Analysts expect China to take a gradual approach to further stimulate the economy The mighty 790 KFGO

By Anisha Sircar

(Reuters) – China is likely to stick to a gradual approach to stimulating its economy, although recent moves by its policymakers are unlikely to revive sentiment without further supply-side reforms and aggressive easing measures, market watchers said.

Earlier this week, China announced its biggest-ever cut in its benchmark mortgage interest rate, a move that left markets disappointed.

Howe Chung Wan, head of Asia fixed income at Principal Asset Management, expects a slower approach from Chinese policy, he told the Reuters Global Markets Forum (GMF).

“Policymakers are focused on resolving the medium-term structural issues in debt, real estate and other parts of the economy where leverage is too high,” said Wan, whose firm manages more than $540 billion in assets.

At the same time, they want to ensure that the “economy does not spiral” by taking specific measures to support the cyclical nature of China's economy, he said. “Therefore, no major support measures are to be expected.”

Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, said this week's loan prime ratio (LPR) cut by the People's Bank of China (PBOC) was “too little, too late.”

The PBOC risks falling behind with this approach, as data showing China's headline inflation fell 0.8% in January requires much quicker action, Herrero said.

Chi Lo, senior Asia Pacific market strategist at BNP Paribas Asset Management, stressed the need to maintain a larger “rg” gap and keep real interest rates well below real output growth to sustain economic growth and reduce debt.

“Monetary policy easing must continue with a more aggressive injection of net liquidity,” Lo said, adding that if PBOC policy remains insufficient, GDP growth could remain at around 4% to 5%, further hurting companies' earnings prospects and assets could prices.

With default rates rising, including beyond the real estate market, it is “important to lower the real interest rate for an economy that is struggling to reach its potential,” Natixis' Herrero said.

With interest rates above equilibrium, China could risk ending the year with a negative output gap, she warned.

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(Reporting by Anisha Sircar in Bengaluru; Editing by Divya Chowdhury and Muralikumar Anantharaman)