Economists said China may loosen its monetary policy further to free up more cash in an effort to beat the economic slowdown.

Qu Hongbin, HSBC's chief economist in China, said unconventional measures are needed during an unconventional period.

He said the government should roll out more proactive fiscal measures and ease monetary policy to prevent a "hard landing," which refers to when an economy goes directly from a period of expansion to a recession.

"It's like a fairytale to hope for private consumption to shore up the economy," Qu said. "Government support is the backbone to ride out a slowdown."

China's trade slump worsened in December as exports fell 2.8 percent, the fastest rate in a decade.

"The exports data is the start of bad news," said Qu. "China's exports may face double-digit drops in two to three years."

Qu said falling inflation provides an opportunity to ease monetary policy.

Qu said he expects the one-year lending rate to drop to 3.42 percent this year from 5.31 percent now and that it will remain flat in 2010.

The People's Bank of China has cut interest rates five times and relaxed reserve requirements for major financial institutions three times since a monetary easing cycle began in September. Zhou Xiaochuan, the People's Bank of China governor, has said that the central bank will provide financial support and take measures to boost the economy.

The easing monetary policy has already had an effect.

China's M2, the broadest measure of money supply, rose 17.8 percent in December, the fastest in seven months and much quicker than expectations. "With a one-year lending rate of 5.31 percent and reserve requirement ratio of 15.5 percent for big banks, there is still room for further monetary loosening," Sherman Chan, a Moody's economist at Economy.com, said.

"Inflation is not a concern now. Inflation growth has slowed dramatically in recent months. Commodity prices are much lower compared to a year ago, and demand-driven inflationary pressures are rapidly evaporating," she added.

Chan said she expects the one-year loan rate to be trimmed to 4.5 percent by the end of the first quarter, while the proportion of deposits needed to be set aside by major banks will be dropped to 13.5 percent.

Citic Securities Co said monetary credit is an early indicator of an improving economy, and the changing rate of monetary credit growth can indicate an economic trend.

"Increased credit usually precedes an increase in fixed asset growth by three months. If credit continues to increase, especially if credit in January 2009 continues to grow at a rapid rate, then this will cause fixed asset investments to rapidly grow after the second quarter," Citic Securities said.

(Shanghai Daily January 15, 2009)