REPEAT:Analysts:China's Targeted RRR Cut Doesn't Signal Easing

Repeats Story Initially Transmitted at 09:26 GMT Oct 10/05:26 EST Oct 10

     BEIJING (MNI) - The central bank's targeted cut of the reserve requirement

ratio (RRR), which takes effect next year, is not expected to have a major

impact, as the new rule replaces rather than supplements the previous targeted

RRR cut policy and so does not signal a major easing of the central bank's

monetary policy stance, according to analysts.

     The People's Bank of China stated on its official website on Sept. 30 that

banks that can show that either 1.5% of their new loans or outstanding loans at

the end-2017 were made to targeted sectors, including small and micro-sized

enterprises, agricultural firms, start-up companies, students and people living

below the poverty line, will get a 50 basis-point reduction in their RRR from

Jan. 1. 

     Those banks that allocated 10% or more of their new loans on average this

year, or 10% of their outstanding loans at the end of the year, to those

specified sectors will get an additional 100 basis-point reduction in their RRR.

     Importantly, the PBOC stated that the new rule would replace two existing

targeted RRR cut rules announced in 2014 and 2015 that applied to banks that

supported micro and small-sized businesses and agricultural enterprises. Those

rules required a higher threshold of loan support to those sectors, though, and

left out start-up companies, students and people living below the poverty line. 

     The majority of China's big banks, and around 90% of city commercial banks

and 95% of rural commercial banks, will be eligible for the 50 basis-point cut

under the new criteria, but only a few are expected to be eligible for the 100

basis-point cut.

     Analysts have different estimates of how much liquidity will be added to

the banking system under the new RRR rule. Haitong Securities estimated the cut

will release around CNY300 billion in liquidity, while China Merchant Securities

said the cut will inject around CNY430 billion to 555 billion. 

     Analysts generally agree the impact will be lower than an across-the-board

RRR cut of 0.5 percentage point, which they said would inject liquidity of about

CNY700 billion.

     Analysts also argued that the targeted RRR cut does not suggest a

turnaround of the PBOC's "prudent and neutral" monetary policy stance. 

     "A targeted RRR cut is different from an across-the-board RRR cut. The

former is a structural policy, which aims to optimize the structure of credit,"

Changjiang Securities said in an analysis last week. "At present, economic

conditions are steady and the economy's resilience is strong, so with the

financial risk-prevention campaign continuing, an across-the-board RRR cut is

not possible."

     Jiang Chao, an analyst at Haitong Securities, said on Monday that the PBOC

does not have much wiggle room on monetary policy, given the potential bubble in

China's property market and also because of the likelihood the U.S. Federal

Reserve will continue to increase interest rates while contracting its balance

sheet. 

     The aim of the RRR cut is not to inject liquidity into the financial

system, but rather to solve difficulties in providing financing for parts of the

real economy.

     "The most important aim of the targeted RRR cut is to set up an incentive

structure to encourage banks to direct more credit to the inclusive finance

area. And the RRR cut is one of a series of policies to support small and

micro-sized enterprises," Li Huiyong and Qiu Difan, analysts at Shenwan Hongyuan

Securities, said on Sunday. "The ultimate aim of the cut is to solve the

problems that small and micro-sized companies are having borrowing money from

banks because of the impact on banks from tighter regulations."

     "The main goal of monetary policy is still to control the aggregate

quantity of money while adjusting the structure of credit," Li said. "Any

analysis arguing the targeted RRR cut signals the relaxation of monetary policy

caused by economic pressure or other factors misses the point."

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

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

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