RRR cut releases liquidity of $5.28 billion to market

Joint-equity banks added to reserve requirement cut

China's second targeted reserve requirement cut this quarter came into force on Monday, with some joint-equity banks added to the roll of lenders eligible for the cut, fueling speculation over whether decision-makers will shift to a more expansionary monetary policy to fortify the Chinese economy.

Joint-stock commercial banks China Merchants Bank Co and Industrial Bank Co Monday confirmed the cut, by 0.5 percentage points, in their filings to the Shanghai Stock Exchange.

Another bank reportedly covered by the cut, China Minsheng Banking Corp, has yet to issue any confirmation.

Uplifted by the news, all three banks Monday posted gains in Shanghai trading, sending the Shanghai Composite Index to a two-month high of 2,085.98.

As previously announced, the People's Bank of China (PBOC), the country's central bank, will lower the portion of deposits that certain financial institutions must set aside as reserves by 0.5 percentage points beginning Monday.

The cut will cover two-thirds of the country's city commercial banks, 80 percent of rural commercial banks and 90 percent of rural cooperatives above the county level as well, the central bank said in a statement posted on its website on June 9.

The latest move will not include banks already included in the last cut in late April, when the central bank announced it would reduce the reserve requirement ratio (RRR) by 2 percentage points for county-level rural commercial banks and by half a percentage point for rural credit cooperatives.

The PBC, however, rebuffed claims that it has expanded eligibility for the RRR cut.

"There's no extension," read a post on the PBC's official Weibo on Monday, which also said the cut was planned to cover institutions that include State-owned commercial banks, joint-equity commercial banks, city commercial banks and rural commercial banks.

But the breakdown of lenders eligible for the latest cut, which is outwardly different from its previous statement, has yet to convince economists there has been no change in policy stance.

Announcements of such targeted moves require more clarification, Li Wei, a Shanghai-based economist at Standard Chartered PLC, told the Global Times on Monday.

According to Li, the application of RRR cuts to the three banks will be expected to release liquidity of about 33 billion yuan ($5.28 billion) into the market, in addition to a liquidity injection of between 70 and 80 billion yuan estimated for the cut, not including share-holding banks.

Although it seems the amount of liquidity injection as a result of the extension appears negligible, it serves to cement market belief that "the central bank's monetary policy has been shifting from neutral to loose," Yao Wei, China economist at Societe Generale SA in Hong Kong, told the Global Times on Monday.

Through the re-lending operations and the two targeted RRR cuts, the central bank has pumped about 600 billion yuan into the market so far, equivalent to the amount of capital injection via a blanket RRR reduction, Yao estimated.

With the property sector remaining a concern in terms of the slowing economy, the central government will continue policy easing by introducing more modest fine-tuning measures to put a floor under growth of the economy, which hit its lowest level in six quarters from January to March, she added, noting that the announcement of a universal RRR cut is still likely.

The latest remarks by a central bank official also hinted that more loosening actions are in the pipeline.

It should be understood that deflationary pressures are already being felt, and therefore a prudent monetary policy needs to focus on steering toward low-cost financing over the long term, the official China Securities Journal reported on Monday, citing Xu Nuojin, a deputy director of the statistics department of the PBC.

Simply abandoning investment - an engine for economic growth and a mainstay for stable employment and thriving consumption - would have a negative influence on the economy, said Xu, who suggested that modest cuts in reserve requirements and interest rates should be an emphasis in policymaking in the near future.

With an expectation of more policy easing measures over the next few months, economic growth will rebound slightly to 7.5 percent in the third quarter and 7.6 percent in the fourth quarter, versus a 7.4 percent growth forecast for the second quarter, Zhang Zhiwei, chief China economist at Nomura Securities in Hong Kong, said in a research note sent to the Global Times on Monday.

China's GDP growth is expected to be 7.5 percent for the whole year, thus meeting the official target, according to Zhang.