MNI EXCLUSIVE: China Advisors Urge Further Reserve Ratio Cuts

     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

MNI.

     "Monetary and fiscal policies should be coordinated," Xu said, adding that

policymakers see investment and consumption as fundamental for stabilising

growth.

     --SPECIAL BONDS

     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: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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