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Analysts: China's Targeted RRR Cut Does Not Signal PBOC Easing

     BEIJING (MNI) - The central bank's targeted cut of the reserve requirement
ratio (RRR), which takes effect next year, is not expected to have a major
impact, as the new rule replaces rather than supplements the previous targeted
RRR cut policy and so does not signal a major easing of the central bank's
monetary policy stance, according to analysts.
     The People's Bank of China stated on its official website on Sept. 30 that
banks that can show that either 1.5% of their new loans or outstanding loans at
the end-2017 were made to targeted sectors, including small and micro-sized
enterprises, agricultural firms, start-up companies, students and people living
below the poverty line, will get a 50 basis-point reduction in their RRR from
Jan. 1. 
     Those banks that allocated 10% or more of their new loans on average this
year, or 10% of their outstanding loans at the end of the year, to those
specified sectors will get an additional 100 basis-point reduction in their RRR.
     Importantly, the PBOC stated that the new rule would replace two existing
targeted RRR cut rules announced in 2014 and 2015 that applied to banks that
supported micro and small-sized businesses and agricultural enterprises. Those
rules required a higher threshold of loan support to those sectors, though, and
left out start-up companies, students and people living below the poverty line. 
     The majority of China's big banks, and around 90% of city commercial banks
and 95% of rural commercial banks, will be eligible for the 50 basis-point cut
under the new criteria, but only a few are expected to be eligible for the 100
basis-point cut.
     Analysts have different estimates of how much liquidity will be added to
the banking system under the new RRR rule. Haitong Securities estimated the cut
will release around CNY300 billion in liquidity, while China Merchant Securities
said the cut will inject around CNY430 billion to 555 billion. 
     Analysts generally agree the impact will be lower than an across-the-board
RRR cut of 0.5 percentage point, which they said would inject liquidity of about
CNY700 billion.
     Analysts also argued that the targeted RRR cut does not suggest a
turnaround of the PBOC's "prudent and neutral" monetary policy stance. 
     "A targeted RRR cut is different from an across-the-board RRR cut. The
former is a structural policy, which aims to optimize the structure of credit,"
Changjiang Securities said in an analysis last week. "At present, economic
conditions are steady and the economy's resilience is strong, so with the
financial risk-prevention campaign continuing, an across-the-board RRR cut is
not possible."
     Jiang Chao, an analyst at Haitong Securities, said on Monday that the PBOC
does not have much wiggle room on monetary policy, given the potential bubble in
China's property market and also because of the likelihood the U.S. Federal
Reserve will continue to increase interest rates while contracting its balance
     The aim of the RRR cut is not to inject liquidity into the financial
system, but rather to solve difficulties in providing financing for parts of the
real economy.
     "The most important aim of the targeted RRR cut is to set up an incentive
structure to encourage banks to direct more credit to the inclusive finance
area. And the RRR cut is one of a series of policies to support small and
micro-sized enterprises," Li Huiyong and Qiu Difan, analysts at Shenwan Hongyuan
Securities, said on Sunday. "The ultimate aim of the cut is to solve the
problems that small and micro-sized companies are having borrowing money from
banks because of the impact on banks from tighter regulations."
     "The main goal of monetary policy is still to control the aggregate
quantity of money while adjusting the structure of credit," Li said. "Any
analysis arguing the targeted RRR cut signals the relaxation of monetary policy
caused by economic pressure or other factors misses the point."
--MNI Beijing Bureau; +86 10 85325998; email:
--MNI BEIJING Bureau; +1 202-371-2121; email:
--MNI Beijing Bureau; +86 (10) 8532-5998; email:
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