China Targeted RRR Cut Not A Sign of Loosening: Analysts

     BEIJING (MNI) - The Chinese government's plan for a targeted cut in banks'

required reserve ratio (RRR) does not signal a loosening of monetary policy,

financial analysts said Friday.

     An across-the-board cut in the RRR, which would add significant liquidity

to the interbank market, is unlikely to happen in the near term, they said.  

     On Wednesday night, the State Council, China's policy making cabinet,

announced a plan for the People's Bank of China to cut the RRR cut for banks who

meet certain criteria related to providing funding for small and micro-sized

businesses, though the exact details of which banks would qualify have yet to be

announced. 

     The liquidity released by the targeted RRR cut is not expected to be large.

Guotai Junan Securities made a rough estimate that about CNY150 billion in

liquidity would be released, on the assumption that the targeted RRR cut would

apply to all small and medium-sized banks and the RRR would be lowered by 0.5

percentage point. Tighter criteria would mean a smaller liquidity injection. 

     Some analysts expect the PBOC to announce the details of the targeted RRR

cut within two weeks, given previous similar procedures, while others expect the

details won't be announced until later in October due to the influence of the

National Day holiday next week and the Communist Party Congress that begins Oct.

18.

     This would be the eighth time that China has implemented a targeted RRR

cut. It did so twice in 2014 and five times in 2015, each time to support

funding for the agricultural sector and/or small to micro-sized businesses.

     Some optimistic market participants argued that the targeted RRR signaled a

loosening of monetary policy.

     "The last bond bull market started on April 16, 2014, after the State

Council announced a cut in the RRR for agricultural commercial banks," a

Beijing-based bond trader in a commercial bank argued. "After that, the PBOC

first did a targeted RRR cut, then an across-the-board RRR cut, causing a bull

market wave." 

     Other analysts disagreed.

     "Although the two targeted RRR cuts announced by the State Council in 2014

can now be recognized as a loosening signal, with regulators noticing the

pressure on fundamental economic conditions, this time is quite different, as

economic conditions, asset prices and financial risks are all quite different,"

Tang Yue and Zuo Dayong, analysts with Industrial Securities said Thursday. "So

given the focus on financial risk prevention and financial deleveraging, we

should not over-interpret the move as a signal of a turnaround in monetary

policy."

     An RRR for all banks remains unlikely, most analysts agreed.

     "The economic growth target for this year can be achieved easily, so the

downward pressure on the economy is not great enough to require the PBOC to

stimulate by cutting the RRR [for all banks]," Hua Changchun and Wei Feng,

analysts from Guotai Junan Securities said Friday. "In addition, the financial

deleveraging campaign and controls on the real estate sector are likely to

continue, both of which require that monetary policy not to be loosened."

     Monetary policy this year, according to Shao Wenbo, senior analyst at

Shanghai Pudong Development Bank, is likely to remain focused on structural

adjustments: ensuring the financial system provides greater support for the real

economy; reducing financial system risks; and compressing the speculative

arbitrage space that financial institutions currently have.

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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