MNI SOURCES: More PBOC Easing Unlikely Soon As Levers Limited

--USDCNY May Not Break 7 Despite RRR Cut: 2nd CenBank Advisor

     LONDON (MNI) - The People's Bank of China's latest cut in banks' reserve

requirements is unlikely to be followed quickly by further easing moves, as it

copes with limited policy levers to boost real economy credit and tries to avoid

undermining the yuan, sources close to the central bank told MNI.

     The PBOC's announcement Sunday that it would cut the RRR for commercial

banks and rural cooperatives by 1 percentage point from Oct 15 came both as

exporters face a hit from the trade conflict with the U.S. and as the

government's deleveraging campaign has blocked credit supply to smaller

businesses.

     But room for manoeuvre is limited, a source familiar with PBOC's operations

told MNI.

     "The funding difficulty of the small private companies is largely due to

the low risk appetite of lenders and credit shrinkage, so there is little space

for a further RRR cut this year, but maybe one in Q1 next year," the source

said.

     The reduction in the requirement will inject a net CNY750 billion into the

economy after retiring CNY450 billion of lending instruments. The ratio will

stand at 14.5% for large institutions and 12.5% for small and medium-size ones.

     This weekend's move came after the yield on U.S 10-year Treasuries rose

above 3.2% during China's week-long National Day holiday.

     --USDCNY SHOULD HOLD 7 LEVEL

     But authorities remain confident of being able to avoid sharp capital

outflows or any unwanted depreciation of the yuan, another source close to the

PBOC said, thanks to measures including the reintroduction of the

counter-cyclical factor into the currency's fixing-price formula, stricter

capital controls and the capacity to intervene directly in forex markets via the

sale of reserves.

     "The central bank is capable of keeping the yuan exchange rate at a

'certain level', and USDCNY will probably not break 7," the second source said.

     Authorities expect any easing in demand for exports to have a knock-on

effect on manufacturing investment, which will likely slow alongside

already-stalled infrastructure investment.

     "Now is the right time to cut the reserve requirement ratio as several

indicators have shown downturn pressure and we need long and medium-term capital

to cope with the weak growth momentum," the source familiar with PBOC's

operations said, adding that domestic stability and growth are authorities' main

priority, despite the dispute with Washington.

     Concerns over inflation are also rising, as pork, vegetable prices and oil

prices all increase. But sources said this does not worry the PBOC over the

short term.

     "Weak domestic demand should not allow for a continued rise in CPI, but in

the long run, it would be a concern," the second source close to the PBOC said.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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