China’s central bank cut the amount of cash banks must hold in reserves on Saturday, boosting lending capacity by an estimated 350-400 billion yuan ($55.6-$63.5 billion) in a bid to crank up credit creation as the world's second-biggest economy faces a fifth successive quarter of slowing growth.
The People's Bank of China (PBOC) is on the course of gentle policy easing to cushion the world's fastest-growing major economy against stiff global headwinds as Europe's debt crisis grinds on, although it has been treading warily.
The cut, announced late evening, is set to boost the confidence of domestic stock investors, who have been eagerly awaiting clear signs of an easing of monetary policy.
“It's a very positive move for the stock market, and it will create a bullish stock market,” Li Daxiao, the research head of Shenzhen-based Yingda Securities, said in an online note. The PBOC cut big banks' reserve requirement ratio (RRR) by 50 basis points to 20.5 per cent, effective from next Friday, after repeatedly defying market expectations for such a move after it first cut the ratio last November. Jin Qi, an assistant governor with PBOC, said in comments published on Sunday that China would continue to stick to a prudent monetary policy. “Economic downward pressures coexist with price rise pressures,” she said.
But, if bank lending stays weak and capital inflows remain volatile, the central bank would have no choice but to cut RRR further, analysts said. “It’s not a big surprise. Although they (Chinese leaders) stress policy stability, an RRR cut is necessary. Trade and monetary data in January pointed to some downward pressure on the economy," said Hua Zhongwei, an economist at Huachuang Securities in Beijing. “But policy easing will be gradual given the central bank sounded cautious about inflation in its fourth-quarter monetary policy report.”
China’s economy is likely to slow to an annual growth rate of 8.2 per cent in the first quarter from 8.9 per cent in the previous quarter, according to the latest Reuters poll.
Data for January came in below market expectations, with exports contracting 0.5 per cent from a year earlier and money supply growth falling to 12.4 per cent from the previous month’s 13.6 per cent, which analysts said argued for more easing.
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“The growth implications of the below-normal lending in January are dire, should that lending pace be continued," said Paul Markowski, President of New York-based MES Advisers, a long-time investment adviser to China's monetary authorities, who calculates lending was on a 7.9 per cent growth path. “The implication of that is sub-seven per cent GDP growth for the year - a real recession,” he said.
Ramifications for the world
Economists broadly believe China's economy needs to grow at around eight per cent a year to absorb the annual influx of new entrants to the workforce and rural migrants leaving the land to find jobs in the country's vast factory sector.
Slower growth also has ramifications for the world economy - already hampered by decaying demand from debt-ridden Europe and still under-spending US consumers - given that China now adds more each year to net global growth than any other nation.
China's leader-in-waiting, Xi Jinpeng, assured an audience of business executives in Los Angeles on Friday that China's growth would not falter it would continue to rebalance its economy to import more from other countries. “There will be no so-called hard landing,” said Xi, who is almost sure to succeed Hu Jintao as Chinese president in just over a year, on the final day of his tour of the United States. The central bank announced its first cut in RRR in three years on November 30, 2011, taking the rate down by 50 bps.
Investors had expected another RRR cut ahead of the Chinese Lunar New Year in late January, but they were wrong-footed as the central bank opted for open market operations to provide short-term cash for banks. A Reuters poll conducted in January showed economists expected the central bank to cut the reserve ratio by a total of 200 bps over the course of 2012 to 19 per cent.
Few analysts believe the central bank will cut interest rates outright this year, with annual inflation staying stubbornly higher than the one-year deposit rate of 3.5 per cent.
With annual consumer inflation having ticked back up to 4.5 per cent in January from 4.1 per cent in December, after averaging more than five per cent through 2011 versus the government's four per cent target, the PBOC is expected to remain cautious about aggressive monetary easing in the near term.
"We still see four more RRR cuts in the remainder of the year," said Shen Lan, an economist at Standard Chartered Bank in Shanghai. "The central bank may still stress policy stability. The next cut should be in Q2."
Continuing caution
The PBOC revealed in its fourth-quarter monetary policy report that it had cut parameters of the dynamic differentiated RRR for selected banks late last year and early 2012 and said it will "make the full use" of the policy tool this year.
In addition, the PBOC has conducted a series of reverse repos to inject cash into the banking system.
The government is reluctant to give the green light to another bout of big bank lending given that it is still dealing with the after effects of the lending boom ordered as part of a 4 trillion yuan ($635 billion) stimulus package at the height of the 2008/09 global financial crisis.
Policymakers are determined to avoid another speculative bubble, such as the one in real estate that they have struggled for two years to adequately cool, gaining real traction only in the fourth quarter of 2011.
Average home prices fell by 0.2 per cent in January from December, the fourth straight month of falls, according to a Reuters weighted average index based on official data released on Saturday.
Rather than take big steps to loosen monetary conditions, the PBOC has gradually relaxed some controls on credit at smaller regional institutions in recent months to support the slowing economy.
That has dovetailed with the central bank's tweaking policies meant to contain property speculation, by ordering banks to support first-time home buyers, as home prices have continued to fall.
Key to when the PBOC next cuts the RRR will be what happens with inflation.
"It's hard to predict the exact timing of a cut, but policy loosening will continue as inflation eases," said Wang Hu, an economist at Guotai Junan Securities in Shanghai.