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Global specialists positive on China’s reserve ratio cut

Updated: Apr 20,2015 6:54 PM

China’s central bank announced on April 19 that it would cut the amount of cash banks need to hold in reserve, starting from April 20. Global financial experts reacted positively to the government’s action to add more liquidity to the economy.

The magnitude of the latest one percentage point cut in the reserve requirement ratio (RRR) means about 1.2 trillion yuan ($197 billion) of liquidity will be injected into China’s financial system, HSBC analysts told the Financial Times.

Zhu Haibin, J.P. Morgan China Chief Economist, said that “obviously the size of the cut is beyond market expectations’’.

The magnitude of the RRR cut is the largest since 2009 and is driven by the consideration that macroeconomic developments remain on the soft side, he said.

“The economic activity indicators are the weakest since 2009. In particular, adjustment in the manufacturing and real estate sectors are major drags on economic growth. Growth stabilization now becomes the priority policy consideration,” Zhu said.

Zhu expected no more reserve ratio cuts for the rest of the year but this largely depended on how capital flows evolve.

David Marsh, managing director and co-founder of London-based Official Monetary and Financial Institutions Forum, said China is showing the rest of the world that it understands what it means to be a major creditor nation.

The People’s Bank of China (PBOC) cut in reserve requirements shows that the firm renminbi provides adequate cover for sensible domestic easing measures. The firmer renminbi has a contractionary effect in the economy, and the PBOC is countering this with the RRR cut.

“This is a sensible move,” he said, adding the measures shall not be regarded as strong stimulation but just directional control.

Jim O’Neill, the British economist best known for coining BRIC, currently honorary professor of economics at the University of Manchester in the UK, said with inflation so low, and below the stated target, and with the economic cycle softening, then the case for more monetary easing was not only obvious, but necessary.

“What I am impressed about, continuously, is China attempts to avoid bubbles before they become actual bubbles by dealing with them beforehand,” he said.

Talking about the Chinese economy, O’Neill said 7 percent GDP growth for an economy of $10 trillion is the equivalent for Japan growing by 14 percent, or the United States by 4 to 5 percent.

Duncan Freeman, senior research fellow of the Brussels Institute of Contemporary China Studies, said recent data suggested a broad slowdown in growth for the Chinese economy, and the policy moves by the government in the last few months indicated that it is responding to this.

“China must face these problems, while also undertaking reform and restructuring of the economy and also maintaining sufficient growth rates. It is too early to know how the current policies will work out, the next year will provide a much clearer idea of the progress being made,” he said.

He said compared to the stimulus adopted after the crisis in the US and EU, the recent policy initiatives of China are very limited.

Credit and money supply data show that there has been no major expansionary boost to the economy, he said.

Much of the policy has been directed to provide support to specific sectors rather than a broad stimulus, and has been limited in its outcome, but there was difficulty in balancing support to the economy with the need to avoid the type of bubbles that emerged after 2009, especially in the real estate sector, he added.

“It is true that the growth rates in China are slowing, but it is clearly not in recession,” he said.

In its latest report, the A-shares Strategy Team with United Banks of Switzerland Securities said Premier Li Keqiang recently expressed that they are accelerating the release of policies to stabilize growth and the RRR cut should mainly benefit traditional fund-sensitive sectors such as banks, non-bank financials, real estate and the non-ferrous metal industry.

Arthur Kroeber, head of research at Gavekal Dragonomics, told Reuters that RRR has been at 20 percent for a long time, and that has created room for it to go down further.

Helen Qiao, Greater China economist at Morgan Stanley, told Bloomberg News that the latest cut was “warranted given the sharp slowdown”.

“The move is positive, showing policymakers are trying to offset the impact of potential capital outflow and stabilize the macro environment,” Qiao said, adding that the cut “shows the intensification of policy easing”.

“As China starts to restructure the balance sheets of local governments, the Chinese central bank can, should and likely will play a more active role in the process,” Liang Hong, chief economist at China International Capital, an investment bank in China, told The Wall Street Journal.