RRR cut unlikely: economists

A fully-fledged cut of the reserve requirement ratio (RRR) for banks is unlikely, as the central bank prefers targeted monetary tools, economists have said, as speculation mounts about such a dramatic move to heat China's lukewarm economy.

Faced with an economic slowdown, the People's Bank of China (PBOC) has been treading cautiously in its monetary policy shift. Instead of an RRR or interest rate cut, the central bank has resorted to measures such as "targeted" RRR cuts for rural banks and re-lending.

However, speculation was fuelled by Premier Li Keqiang saying last Friday during an inspection tour that China's economy still faces "relatively big" downward pressure and timely policy finetuning is needed.

While some analysts see a rising possibility of a RRR or rate cut, Peng Wensheng, chief economist of the China International Capital Corporation (CICC), said such a possibility is small.

There is a tendency for the central bank to resort to capital injection instead of RRR or rate cuts in easing the monetary policy, he said.

"Another explanation is the economic situation is not that bad, and the central bank prefers low-profile and targeted monetary easing. A RRR cut is not only high-profile, but also has too strong an influence," Peng added.

However, he expects the central bank to apply such an "indicative" move as a RRR cut only if the economic downward pressure continues to build.

In its research note, the CICC attributed the low possibility of a RRR cut to the fact that interest rates for interbank lending have been at a stable level that is remarkably lower than the same period last year.

The investment bank expects China's M2, a broad measure of money supply that covers cash in circulation and all deposits, to increase in May through more open market operations and finetuning.

Echoing Peng, Lu Ting, chief China economist with Bank of America Merrill Lynch, said, "The new government is determined to break away from the past mode of policy easing," featuring cuts to RRR or interest rates.

In a research note, Lu forecast that the government will roll out "targeted stimulus measures" which emphasize fiscal spending by the central government, reduce funding costs, especially for small borrowers, attract private capital, and ease restrictions in the property market.

Monetary policy is already being finetuned and the words of Premier Li "do not suggest significantly more aggressive moves such as RRR cuts or rate cuts," Lu added.

The "targeted" measures are expected to take effect soon. The PBOC disbursed 100 billion yuan (about 16 billion U.S. dollars) through its re-lending facility to the China Development Bank in April for the renovation of shantytowns.

"If we assume the PBOC maintains this monthly disbursement in May and June, it will have injected about 400 billion yuan into the economy via its re-lending facility," according to a research note of Nomura.h "This, together with targeted RRR cuts for small rural banks, would be equivalent to a RRR cut of 45 basis points," it added.

However, some economists are calling for aggressive easing measures, saying only a RRR cut would have substantial effect.

Lu Zhengwei, chief economist of Industrial Bank, said interest rates for both the monetary and bond market are too high when taking the need for fostering economic growth.

"All those open market operation tools, including reverse repo, short-term lending facility, short-term liquidity operations, re-lending, are only like squeezing toothpaste. They are too weak and not going to ease market anxieties," he added.