• Growth At Three-Year Low
• Experts Say Easing On The Cards
• Commodity Currencies Gain

Data out this morning concerning the state of the Chinese economy has cleared a path for further stimulus measures in the world’s second largest economy.

Growth fell to a three-year low of 7.6 percent for the three months up to the end of June, with analysts suggesting that the nation’s economic slump had hit rock bottom and was ripe for a more convincing recovery. Light at the end of the tunnel came, however, in the shape of lower inflation for the month of July; a fact which experts say leaves the government free to implement measures to reinvigorate growth.

‘The Door Is Open’, Analysts Say

Inflation came in at 1.8 precent for July and with the government claiming they will continue to act early in order to prevent any slow-down in the economy, we may see further easing over the next few weeks. Figures released earlier this month had already raised the alarm for many investors eyeing the Chinese economy; surveys showed that Chinese manufacturing barely shifted in July, as weakening global demand and the continued euro zone plight took its toll on import appetite.

"The numbers confirm that the door for more monetary easing is open," said Credit Agricole economist Dariusz Kowalczyk in a report. "The data reflects downward pressure on prices coming from weaker commodities," he added.

"We expect CPI inflation to rise from now on, reaching 3.8 percent at year end."

After initially moving to reverse tightened restrictions on economic controls late last year in a bid to revive demand for Chinese goods, the People’s Bank of China is now expected to loosen monetary policy further.  President Hu Jintao and Prime Minister Wen Jiabao have indicated that they want to “fine-tune” the economy in the rest of the year having admitted that the economy still faces "relatively large" pressure to slow further.

What Are The Options?

The PBoC is not the only central bank currently hinting that easing measures to be put in place in the near future. Hopes are currently riding high that the ECB will engage in a further round of bond-buying to ease the pain in Italy and Spain, whilst the Fed and Bank of Japan are also expected to announce measures in the coming days and weeks.

So what are the options for China?

Most experts now expect a cut in bank reserve requirements, with others forecasting a rate cut by the Chinese central bank. HSBC economists have suggested a cut of 0.25 percent “along with other monetary and fiscal measures”.

While the team at IHS Global Insights have suggested that RRR or rate cut reduction were not the PBoC’s only options. Local government investment into business and infrastructure could be implemented as a means to boost productivity in place of any fiscal cuts, the economists said.

Currency Charts: Soft Data Spurs On Risk Sentiment

The soft Chinese inflation figures and renewed intervention hopes from yet another central bank have spurred on the risk-on sentiment dominating markets. The USD dropped against a number of currencies off the back of the data. The EUR/USD stayed stable after the emergence of the data, with any movement from the EUR to the upside of Wednesday’s range.

--CLICK CHART FOR THE LATEST ON THIS PAIR --

The Aussie also benefitted from the Chinese data, pushing to its highest mark since March 20 at $1.0615. As a commodity-linked currency, the AUD is extremely responsive to promise of growth in one of the largest importers of natural resources on the globe. Also helping the Aussie to make gains came from Australian employment data which posted better-than-expected results for the month of July.

After the data emerged, the Hang Seng index was up 0.75 percent, while the Nikkei 225 rose 0.80 percent and the S & P/ASX was up 0.11 percent.

Sarah Cox, Markets Writer. ForexSpace.com