Targeted RRR cut to stabilize growth: analysts

A "targeted" reserve requirement ratio (RRR) cut will help shore up China's economic growth and prevent a debt crisis, analysts said Tuesday.

The State Council said in a statement on Friday that the country will lower the RRR for banks whose loans to the agriculture sector or micro and small-sized enterprises have reached a certain proportion, but without specifying details of when and how much the cuts will be.

On April 25, the central bank cut the RRR for county-level rural commercial banks by 2 percentage points and that of rural credit cooperative unions by 0.5 percentage point.

"The policy aims to optimize the credit structure, as agricultural and small firms have great difficulties in financing, while big State-owned enterprises do not face such a problem," Xu Hongcai, director of the Department of Information under the China Center for International Economic Exchange, told the Global Times on Tuesday.

The April cut had injected about 200 billion yuan ($31.8 billion) into the real economy, according to Xu's estimate.

Though China's economy is running smoothly, it is facing relatively big downward pressure, the statement said, noting that China will continue with a prudent monetary policy and make timely and moderate fine-tuning moves to better serve the real economy.

"As long as the economic growth stays in a reasonable range, authorities are unlikely to change their prudent monetary policy stance," Xu said.

The targeted measure has diminished market speculation for a full-fledged RRR reduction for banks.

"The market was expecting a general RRR cut, but the targeted RRR cuts could be similarly effective in boosting liquidity," Liu Dongliang, a senior analyst at China Merchants Bank, said in a research note sent to the Global Times Tuesday.

Besides the targeted RRR cut, other financial measures mentioned in the State Council statement include increasing loans through the re-lending facility and issuing financial bonds for specific projects to support micro and small-sized firms.

"The move will help relieve debt pressure faced by many small firms," Liu said.

Xu Gao, chief economist of China Everbright Securities Co, still believes there is possibility of an RRR cut for all banks.

"The statement has indicated authorities' determination to loosen the monetary policy… if such measures could not solve financing problems for the real economy, the central bank is likely to roll out a full-fledged RRR cut," he said in a research note sent to the Global Times Tuesday.

But the recovering Purchasing Managers' Index (PMI) data will make Chinese policymakers cautious about any further adjustment in the monetary policy, he also noted.

China's official PMI rose to 50.8 in May from 50.4 in April, marking a third successive pickup in a row and raising hopes of stabilization of the economy.

With a batch of pro-growth policies gradually taking effect, China's economy is likely to stabilize in the second and third quarter of this year, said Liu from China Merchants Bank.

Previous mini-stimulus measures mainly aimed at boosting employment, but the targeted RRR cuts indicate that China has diverted its policy focus to prevent a debt crisis through relieving the funding pressure for local governments and enterprises, Liu said.