Ramped-up monetary support is expected to strengthen China's economic rebound from the COVID-19 disruptions this year and also cement market confidence in the Chinese currency, according to experts and international investment bankers.
Their views are backed by the latest commitment by the People's Bank of China, the country's central bank, to step up support for demand and supply to improve economic performance.
"A reasonably more accommodative monetary condition will be a necessity for China's economic recovery," said Kang Yong, chief economist at KPMG China. There is enough policy space for China to cut interest rates and the reserve requirement ratio — the proportion of money that lenders must hold as reserves — in the first quarter, he added.
Multipronged policy support will help shore up market confidence as COVID-19 disruptions become less frequent.
Economic activity is likely to see a substantial rebound after the Spring Festival holiday later this month, Kang said.
The PBOC said in a statement on Wednesday that multiple measures will be taken to "reduce the financing costs facing market players" and "keep liquidity reasonably ample", as part of its efforts to stabilize economic growth, employment and price levels.
The central bank will ramp up financial support for domestic demand and supply, promote wider consumption and support the construction of key infrastructure and major projects, said the statement, which was issued after the PBOC met to set its work agenda for 2023.
Wang Tao, head of Asia economics at UBS Investment Bank, said she expects China's monetary policy to maintain liquidity at an ample level, adding that there is the possibility of a small RRR cut following one in December. An RRR cut helps expand bank lending to the real economy and stimulate economic growth.
Experts said that keeping growth stable should remain the top priority of monetary policy, despite the concerns of some that further accommodative moves could widen interest rate differentials between the United States and China, and weaken the renminbi.
"In our view, China's growth outlook appears more important to the renminbi than factors such as interest rate differentials and the current account balance," Shan Hui, Goldman Sachs' chief China economist, said in a research report.
The investment bank recently revised its 2023 growth forecast for China from 4.5 percent to 5.2 percent, after the optimization of the country's COVID-19 policy in December and against a lower comparison base in 2022.
With China's economic prospects improving, the renminbi has rallied since November. On Thursday, the central parity rate of the renminbi against the US dollar stood at 6.8926, up 205 basis points from Wednesday, marking its strongest level in about four months, market tracker Wind Info said.
KPMG's Kang said the renminbi might see slight appreciation against the dollar this year on the back of faster domestic economic growth and slower US monetary tightening. He added that China's economic growth for 2023 may accelerate to about 5.2 percent from last year's estimated 2.8 percent.