Central bank makes record cash injection

Governor says various tools could be used to boost economic growth

Expectations of a further cut in the reserve requirement ratio for banks were dampened after the central bank surprised analysts on Tuesday by injecting 220 billion yuan ($34.6 billion) into the banking system through 7- and 14-day reverse repurchase agreements.

Some analysts had read signs in recent policy actions that the People's Bank of China was unwilling to cut the RRR to boost the economy, preferring to use money market operations instead to deliver liquidity injections to the financial system.

Asked at a news conference if he favored money market operations over interest rates or the RRR to manage policy settings in the current environment - which has seen warming property sales - Zhou Xiaochuan, governor of the central bank, said the use of "either tool can't be ruled out".

Tuesday's operation marked a record daily high of its kind, and indicated that 133 billion yuan has been injected into the market this week, against an expected 87 billion yuan due in the same week, according to data compiled by Shanghai Wind Information Co Ltd.

China's overnight money market rate fell the most on Wednesday in seven weeks following the move, according to data compiled by Bloomberg.

"Surely cuts in the RRR would be put off after the large-scale reverse repos. It seems the central bank prefers to release liquidity to banks in a more selective way and increase the monetary base, which cannot be achieved by a RRR cut," said Chen Daofu, policy research chief of the Financial Research Institute at the State Council's Development Research Center.

He added the central bank has hesitated to cut the RRR mainly because the capital outflow prospects are very unclear as present.

"There are signs that capital outflows have probably fallen substantially in the first half of August, in contrast to a big jump in July," he said.

A report by Nomura Securities estimated capital outflows from China rose to $27.2 billion in July from $25 billion in June.

The central bank's frequent use of reverse repurchase over the past eight weeks was in accordance with its statement in a quarterly report released earlier this month, which ranked reverse repurchase operations at the top of the instrument list, said analysts.

A warming in property sales in major cities in July and expectations of further rises in August have also restricted room for more RRR cuts in the short term, as the authorities have taken measures to cool down home prices for more than two years, said Fu Xiongguang, an analyst at Citic Securities.

But Wang Jun, a senior analyst at the China Center for International Economic Exchanges, said resorting to reverse repurchases cannot solve the long-term liquidity shortage and a cut in the RRR is urgently needed.

"The move could only guarantee banks have more money, but without a lower RRR, they cannot lend out more money to companies."

He said the current RRR of 20 percent for major lenders is too high for the current economic conditions, and further cuts to 18 percent should materialize soon.

"The bigger the amount of reverse repos this week, the bigger the redemption next week. It cannot solve the real problem."

To shore up the softening economy, the central bank lowered the RRR for commercial banks in February and again in May. It also cut interest rates in June and July.

Analysts have forecast more loosening measures soon, as economic data for July fell below market expectations.

Export growth in July dropped to 1 percent against a market consensus of 8 percent, while industrial output growth fell by 0.3 percentage points compared with June.

In addition, new yuan lending in July declined sharply to 540.1 billion yuan, the lowest level since September 2011, against 919.8 billion yuan in June, adding to market worries over a liquidity shortage.

"All activity data remained weak in July, suggesting China's slowdown is more severe than expected," said the Australia and New Zealand Banking Group Ltd in a research note.

"Imminent monetary policy easing and faster implementation of fiscal policy will help China's economy gradually regain momentum.

"We maintain our view that the PBOC will cut the RRR by 150 basis points this year, with the first cut by August," it said.

Jing Ulrich, managing director and chairwoman of Global Markets, China at JPMorgan Chase, said that any projected turning point in China's economy should now be postponed to the fourth quarter.

Introducing another large stimulus program this year, despite growing economic tensions, remains an option if conditions deteriorate sharply, according to a report released by Standard & Poor's Ratings Services on Wednesday.

"The government retains significant capacity to support economic growth, if needed, partly because of China's sizable financial assets," said Kim Eng Tan, credit analyst of S&P.

The government may be prepared to pump more money into the economy if the currently stable unemployment rate rises steeply, added the rating agency.

"We still expect real economic growth of 8.2 percent in 2013.

"But in 2012, growth could slow to about 8 percent, compared with average growth of 9.6 percent for the past few years," said Tan.