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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
     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
     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:
--MNI Beijing Bureau; +86 (10) 8532-5998; email:
[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$]

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