China Analysts: RRR Cut Unlikely In Short Term

     BEIJING (MNI) - Financial analysts and executives in China mostly believe

the People's Bank of China will not cut the required reserve ratio (RRR), as

some have urged the central bank to do in order to solve the structural

liquidity issue and extremely low excess reserves ratio problem, while others

believe a marginal loosening of monetary policy would be enough to boost

liquidity.

     The relatively low excess reserve ratio has caused liquidity conditions to

fluctuate this year. According to a CITIC Securities' estimate, the excess

reserve ratio in August was 0.95%, slightly up from 0.90% in July but still near

the historically low level of 0.8% seen in June 2011. 

     Excess reserves are funds deposited by banks with the PBOC that are in

excess of statutory reserve requirements, and are used in settling interbank

transfers. They are considered a key indicator of liquidity. 

     Small and medium-size banks and other non-bank financial institutions

(NBFIs), suffer more when liquidity gets tight compared with big banks, as big

banks can borrow money from the PBOC directly while small and medium-size banks

and NBFIs can only borrow money from the big banks, which can determine whether

to lend funds to their smaller brethren or not.

     Some analysts have urged the PBOC to cut the RRR, as doing so would solve

the structural liquidity problem faced by small and medium-sized banks, as they

would directly receive money coming from a lower RRR.

     "Lowering the RRR would benefit all banks. The biggest 24 borrowers account

for 95% of total PBOC lending, while the 'Big Six' banks plus 12 joint-stock

commercial banks and 10 big city and rural commercial banks account for 80% of

the total asset of the banking industry," Sun Haibo, the CEO of Shanghai-based

Faxun Financial Regulation and Law Co., a financial law consulting company, said

in a report earlier this month. "The number indicates that borrowing from the

PBOC is very concentrated."

     Cutting the RRR would also yield other benefits.

     "Bond yields have remained too high, and so it is very difficult for

corporates to issue bonds to get funding," because of the high cost of doing so,

Deng Haiqing and Chen Xi, analysts at Jiuzhou Securities, said in a report last

week. "Cutting the RRR would loosen the bond market and help to lower bonds

yields."

     Deng and Chen urged the PBOC to take advantage of the current window of

opportunity to cut the RRR.

     "In August, the economy showed signs of slowing, so cutting the RRR would

not lead to an overheating of the economy," Deng and Chen said. "Moreover, an

appreciating yuan gives the PBOC more room to cut the RRR because it doesn't

have to worry that cutting the RRR will lead to rapid depreciation of the yuan."

     Despite the benefits a cut to the RRR would have, most analysts said they

do not believe the PBOC will go ahead with the move, mainly because of the

strong signaling effect it would send.

     "Although the pressure on the [yuan] exchange rate is relaxed in the short

term, which gives more room for [implementation of] monetary policy, the economy

has not slowed too much and the main theme for China is still to prevent risks

and control bubbles," Jiang Chao and Liang Zhonghua, analysts with Haitong

Securities, said in a report last week. "The signaling effect from cutting the

RRR would be too strong and would go against [the Chinese government's]

deleveraging campaign, so we do not believe the RRR will be decreased in the

short term."

     Tang Yue, an analyst with Industrial Securities, said the government's GDP

target this year, which is around 6.5%, can be "easily achieved," so a temporary

fluctuation of economic data will not change the emphasis on preventing

financial risks.

     The core question, according to Tang, is whether the funding conditions of

the real economy have worsened, causing the real economy to slide -- which would

force  policymakers to change their policy theme.

     Meanwhile, some analysts believe the PBOC could use money market tools at

its disposal to increase liquidity, instead of cutting the RRR.  

     Shenwan Hongyuan Securities estimates that cutting the RRR 0.5 percent will

release CNY700 billion into the banking system, and tools like the Medium-term

Lending Facility (MLF) and Temporary Liquidity Facility (TLF) can be used by the

PBOC to inject the same amount of liquidity into the system.

     Although cutting the RRR is unlikely at the moment, analysts point out that

the PBOC might need to loosen its monetary policy stance marginally to sustain

the credit growth.

     "We estimate the money multiplier in August was 5.45, roughly the same as

in July, suggesting the money multiplier is reaching its limit," Ming Ming, an

analyst with CITIC Securities, said Tuesday. "Commercial bank credit is

difficult to expand given this background, so the PBOC needs to supply more

money to ensure social credit growth."

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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