More lenders make RRR cuts

An Industrial Bank Co Ltd branch in Xiamen, Fujian province. The central bank has permitted the lender to reduce the reserve requirement ratio by 50 basis points as part of the efforts to shore up the slowing economy. [Photo/China Daily]

Economists say more policy tweaks necessary for achieving growth target

China Merchants Bank Co and Industrial Bank Co Ltd announced on Monday in separate statements to the Shanghai Stock Exchange that they had received approval from the central bank for a 50 basis point reduction in their required reserve ratios.

China Minsheng Banking Corp Ltd also confirmed by phone to China Daily that the People's Bank of China had allowed it to lower reserve requirements.

Economists said the announcements were a signal that under increasing pressure from an economic slowdown, the government will rely more heavily on monetary policy to boost growth.

Also on Monday, previously announced cuts for other banks became effective. On June 9, the PBOC cut the reserve requirement ratio by 50 bps for commercial banks that have extended a certain portion of their loans to the farming sector or small businesses, according to an online statement.

The June 9 reduction applied to two-thirds of city commercial banks, 80 percent of non-county level rural commercial banks and 90 percent of non-county level cooperative banks, said the PBOC in the statement.

But in a note published on Sina Corp's weibo on Monday, the central bank said the three banks' announcements didn't signal that it had widened the scale of reserve requirement ratio cuts.

It said those cuts apply to qualified commercial banks, including State-owned commercial banks, joint-equity banks, city commercial banks and rural commercial banks.

"It's necessary to intensify stimulus measures to stabilize the economy," said Li Wei, a Shanghai-based economist at Standard Chartered Plc. "The current problems of the Chinese economy are not simply rooted in the fundamentals but also have a lot to do with government policies and market confidence. The central bank should reverse the gradually worsening situation of market confidence through open market operations."

Worried about a further slowdown of credit growth and investment in the real estate market, Li urged the central bank to "make real-time adjustments to its monetary policy according to economic changes" and "cut reserve requirements for all banks nationwide".

By extending the ratio cut to certain joint-equity banks, the PBOC is trying to promote economic restructuring and help agricultural businesses and smaller companies get bank loans more easily and cheaply, said Zhou Jingtong, a senior macroeconomic analyst at the Bank of China Ltd's Institute of International Finance.

The reduction, which covered the majority of city commercial banks and non-county level rural banks, would release about 60 billion yuan ($9.6 billion) to 70 billion yuan of liquidity into the money market, according to a report by China Minsheng Bank.

Now that some joint-equity banks are also included, the effect of the policy will be much greater, said Zhou.

"The central bank is taking small steps rather than using a large-scale stimulus to boost the economy for fear that excessively strong policies will exacerbate credit risks while the country's financial leverage is already far too high," said Zhou. "If the measures taken by the PBOC do not achieve expected results, it will launch more policies."

Xu Nuojin, deputy director of the statistics and analysis department of the PBOC, told a forum on Sunday that all sectors of the community should recognize that the Chinese economy is in "quasi-deflation" mode. A prudent monetary policy should focus on lowering funding costs in the long run and on cutting reserve requirements and interest rates modestly in the short term, said Xu.

He emphasized that growth will slow without sufficient investment and employment will be affected.

The latest Standard Chartered report on the Chinese economy found that the housing market deteriorated further in May. Fixed-asset investment growth dropped to a 17-month low of 9.6 percent year-on-year from 17.5 percent in the first four months.

Based on housing sales and credit growth in May, the China economists at Standard Chartered forecast in the report that actual activity growth is likely to slow further in the third quarter.

"Policy is already being loosened gradually, but more broad-based easing is still needed. Such measures could include reserve requirement ratio cuts, more stimulus to the housing market, more credit availability for local government investment vehicles and more fiscal action," the report said.

Central bank move lifts equities to two month high

Chinese stocks rose on Monday, sending the Shanghai Composite Index to a two-month high, after the central bank expanded the number of lenders eligible for lower reserve requirement ratios.

China Minsheng Banking Corp surged at least 1.7 percent in Hong Kong and Shanghai while Industrial Bank Co climbed 1.6 percent after confirming they had received permission from the People's Bank of China to set aside fewer funds against deposits.

The Shanghai Composite Index rose 0.7 percent to 2,085.98 points. The Hang Seng China Enterprises Index in Hong Kong added 0.1 percent to 10,522.13.

China Merchants climbed 1.6 percent in Hong Kong and 1.7 percent in Shanghai.

"The targeted easing over the past two months has kept a floor under growth and assuaged investors' concerns about a hard landing," said Michelle Gibley, director of international research at San Francisco-based Charles Schwab Corp.

"Chinese stocks are pricing in a lot of bad news and we believe the risk/reward is favorable for owning Chinese stocks over the next 6-12 months."

The Shanghai gauge climbed 2 percent last week as data showed industrial output data and retail sales grew in May, overshadowing a slump in the property industry as sales and construction dropped. The rally through Monday pared this year's loss to 1.4 percent.