China May Ease Soon

History does not repeat, but it does have a way of 'rhyming'. This perspective may be an interesting way of looking at recent actions taken by Chinese policymakers.

China seems to have stopped letting the renminbi appreciate in recent days. It had permitted its currency to rise by 7 percent versus the U.S. dollar from June 2010 to August 2011 in an effort to rein in inflation.

But this may not be bad news...it may be a signal. It could be a signal that Beijing is getting ready to turn towards an easier monetary policy to support domestic economic growth.

The Chinese economy has held up very well so far. Government estimates are for the country to enjoy economic growth this year in excess of 9 percent.

Investors should recall that the last time China “locked” their currency against the dollar was in August 2008. This was just three months before China launched a $586 billion economic stimulus which was crucial to the global economy.

There are other signs too of a softening policy stance coming from Beijing.

China's central bank had raised interest rates roughly every two months and banks' required reserves monthly. But it hasn't raised rates since July or requirements since June.

There have also been stories in China's state-run media about the struggles of small companies due to a noticeable slowing in bank lending. Addressing this matter, China's premier, Wen Jiabao, asked banks to lend more to small businesses and at lower rates.

Stephen Green, an economist at Standard Chartered, believes an easing of policy could come this year: “It seems they are preparing the ground for something called directed easing. The ambition is more credit for small- and medium-sized enterprises.”

Jun Ma, an analyst at Deutsche Bank, agrees saying that in the fourth quarter “...we are likely to see some easing in credit”.

More decisive moves may be just a bit further down the road. Shen Jianguang, an economist at Mizuho Securities, forecasts that other monetary loosening such as cutting banks' required reserves may have to wait the arrival of the new year.

However, signs from Beijing are that investors should not look for a huge stimulus from China ala 2008. China is less dependent on exports today. A move to more domestic-led growth is giving Chinese policymakers confidence that China can weather the global economic storm in relatively good shape without a huge new stimulus.

So the parallels with 2008 are not perfect. But they do seem to be rhyming.