The People's Bank of China (PBC) cut banks' required reserve ratio (RRR) on 30 November for the first time in three years by 0.5 percentage point in response to easing inflation and softening house prices at home and worsening economic environment overseas, the latest issue of Hang Seng Bank's China Economic Monitor says. More RRR cuts are expected in coming months and interest rates will also be lowered, the bank says.

But with inflation and home prices still at relatively high levels, the PBC is likely to ease monetary policy only gradually and modestly in the near-term, Hang Seng Bank says. It expects that, going forward, the central bank of China will cut interest rates 3 times, each by 25 basis points, and the RRR 5 more times, each time by 50 basis points. By the end of 2012, the one-year loan rate would be 5.81% and the RRR for large banks at 18.5%.

Overall, mainland China's economy is on track for a soft landing, Hang Seng Bank says. While the pace of growth is expected to slow moderately in the months ahead, the bank still maintains its forecast of an 8.8% and 9.3% GDP growth respectively for the last quarter and the whole of this year on the back of steady investment and consumption growth.

For 2012, economic growth is likely to slow further to around 8.6% amidst lingering sovereign debt problems in Europe and a fragile global economic recovery. Chinese authorities may slow the pace of appreciation of the RMB versus the USD next year in order to support export growth, the bank says.

While a large fiscal stimulus is not expected, the government would support the economy through tax reductions and local government bond issuance, the bank says.