MNI: Second PBOC RRR Cut Possible, Caution On Policy Rates

Another cut in the reserve requirement ratio for banks is possible in the coming months, but the People's Bank of China remains cautious on lowering policy rates for now despite economic headwinds, advisors and economists told MNI.

Prudent monetary policy is expected to tilt easing to shore up the economy, with the RRR enabling lenders to lower loan rates and absorb government debt issuance ahead, said Lian Ping, chief economist at Zhixin Investment Research Institute.

Another RRR cut can be expected in the rest of the year, he noted.

Traders had speculated that a fresh signal on monetary policy this week could see a cut in the Loan Prime Rate, benchmark loan rates the PBOC announces on the 20^th of each month. But China's central bank on Tuesday left its benchmark rate for loans unchanged for the 15th straight month

SLOWING BANK DEPOSITS

China's commercial banks are still expected to increase lending, but deposit growth slowed to less than 9% this year, below a 12% rise for loans. That decline underlined why a universal RRR cut was needed to give banks more cash on hand, he said.

Another reason to be careful on policy rate cuts is that they may fuel housing and stock prices, said Shang Ming, former official at State Development & Investment Corp. Shang suggested that with an unbalanced economic recovery underway, targeted measures for weaker sectors would be appropriate.

China's economy expanded at a slightly slower than expected pace in Q2, highlighting concerns of a weaker trend for the rest of 2021.

RECOVERY TRENDS

Shang said the recovery has been led by robust exports but domestic consumption and investment are still weak in general, and depending on the recovery of production in Western countries from pandemic conditions is still a risk.

But there are plenty of monetary policy tools if needed to give the economy a shot in the arm, Shang said, predicting the economy would expand over 8% in 2021 and above 5% in 2021.

Zhang Yongjun, deputy chief economist at the China Center for International Economic Exchanges, said the PBOC still needs to evaluate the impact of the first RRR cut, and a policy rate cut could wait.

Zhang echoed that targeted moves are needed, noting financial regulators should ensure funds unlocked by the RRR cut are used for businesses, particularly those facing higher commodity input costs at the factory gate.

CYCLICAL RISKS

China may not want to risk rising property prices with rate cuts even as the State Council wants to prevent downside domestic economy cyclical risk.

An advisor who asked for anonymity however said a policy rate cut is a much more direct way to help companies and since economic fundamentals do not support current high levels.

The advisor said an RRR cut is a blunter tool that largely depends on the willingness of banks to respond with more lending.

But he also said it may be too early for a rate cut before stabilising property prices and the Federal Reserve confirms its tapering track which would pressure China's economy and capital flows.