Why the next ten days could be crucial for China’s 2012

Liontrust's Eoghan Flanagan has urged Chinese policymakers to accelerate monetary easing by the end of the year in order to help boost a slowing economy.

Chinese policymakers cut bank reserve requirements for the first time in three years on 30 November, by 50 basis points to 21%, heightening expectations of further easing in the near future.

Manufacturing data for the country released after that date has appeared to confirm a slowdown in economic activity. HSBC's December purchasing managers' index showed activity had picked up from November but remained at contractionary levels.

"Our view is for People's Bank of China to ease further by cutting reserve ratio requirements before the end of January and a total of four 50bp cuts in 2012," said Wee-Khoon Chong at Société Générale.

Nomura's Zhiwei Zhang also believes China is likely to cut reserve requirements again in Q1 of next year, but said aggressive policy loosening "is unlikely in the short term".

But Eoghan Flanagan, co-manager of the Liontrust Emerging Markets Absolute Return fund, said policymakers should act sooner in order to get ahead of the curve.

"The next two weeks are going to be really significant for China, in terms of whether we see another 100 or 150 points cut in reserve ratio requirements," said Flanagan, speaking on Monday.

He would look to add exposure to China if further easing materialised before the end of the year, up from a current fund weighting of 11%. However, this may be pared if the policy action does not occur.

"The problem with monetary policy is that if you wait until the economy is weakened before cutting, then it is too late," he said.

"You have to cut early in the cycle or use fiscal policy. The last time, in 2008, the Chinese used fiscal policy, but they have said they do not want to do that this time."