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Updated Barclays/Bbg Extension Estimates for US


Late Session Selling

     BEIJING (MNI) - The New Year's Day announcement by the People's Bank of
China of cuts to banks' reserve requirement ratios should be followed by another
two to three RRR reductions, totalling as much as 200 basis points, in order to
support growth and ensure financing is available for key regional spending
projects, policy advisors told MNI.
     Chinese financial institutions may require additional liquidity of up to
CNY3.5 trillion in January, to cope with a spike in demand before the week-long
Chinese New Year holiday starting Jan 24 and to compensate for CNY857.5 billion
in maturing PBOC facilities, according to an estimate from China International
Capital Corporation. The 50-basis-point RRR cut announced Jan. 1, which comes
into effect Jan. 6, will only provide CNY800 billion.
     The PBOC has room to unlock as much as CNY2 trillion via further RRR cuts,
boosting availability of long-term capital and reducing lenders' borrowing
costs, said Zhu Baoliang, chief economist at the State Information Center, a
thinktank under the National Development and Reform Commission.
     The central bank is also likely to take other moves ahead of the January
holiday to boost liquidity, such as provision of reverse repos and medium-term
lending facilities, advisors said. Authorities will be conscious that without
sufficient liquidity, banks may struggle to buy planned issuances of
special-purpose local government bonds, which are key to official plans to boost
infrastructure spending and support the economy, Xu Hongcai, deputy director of
the Economic Policy Commission of the China Association of Policy Science, told
     "Monetary and fiscal policies should be coordinated," Xu said, adding that
policymakers see investment and consumption as fundamental for stabilising
     Special bond issuance could total CNY800 billion in January, according to
CICC, after the Ministry of Finance front-loaded quotas for as much as CNY1
trillion by the end of last year and urged local governments to issue them
swiftly. By Jan. 2, twelve provinces had unveiled issuance plans for January,
totalling CNY438.6 billion, according to state media.
     The RRR cut just announced should free up CNY120 billion in long-term
capital for small and medium-sized banks and reduce lenders' borrowing costs by
about CNY15 billion annually. Further such reductions would add to these sums,
without the risk of fuelling inflation and triggering depreciation of the yuan
which could accompany a cut in policy rates, advisors said.
     Liquidity injections would also be more effective than official rate cuts
in making capital available to the real economy, Xu said, noting that they would
help to keep real-economy lending costs, as tracked by the Loan Prime Rate, on a
downtrend trend.
     However, advisors did not altogether rule out the possibility of interest
rate cuts, particularly if inflation cools in the second half after its expected
peak. A stable or even a stronger yuan against the dollar could also support
marginal policy easing, they said.
     PBOC policy is for a neutral-to-easing bias this year, said Zhang Yongjun,
deputy chief economist at the China Center for International Economic Exchanges.
--MNI Beijing Bureau; +86 (10) 8532 5998; email:
--MNI Beijing Bureau; +86 10 8532 5998; email:
--MNI London Bureau; +44 203 865 3829; email:
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