Analysts forecast more reserve ratio cuts on poor M2 data

BEIJING - China is likely to make another bank reserve ratio cut in the coming weeks to speed up banks' lending capacity following record low M2 expansion, analysts said Thursday.

M2, a broad measure of money supply that covers cash in circulation and all deposits, increased 10.1 percent year on year to 128.08 trillion yuan ($20.97 trillion) at the end of April, according to the People's Bank of China (PBOC), the central bank, on Wednesday.

The M2 expansion was the lowest on record. The growth was also below the government target of 12 percent for 2015.

The PBOC may cut the reserve requirement ratio (RRR), the amount of cash that banks must hold as reserves, by 50 basis points (bps) in the third quarter, said Julia Wang, economist with HSBC Global Research, noting that the central bank already lowered the RRR by 100 basis points last month to 18.5 points.

The move aims to add more liquidity to the world's second-largest economy to help spur lending and combat slowing growth. The economy expanded 7 percent in the first quarter -- the lowest quarterly growth since 2009.

Wen Bin, chief analyst with China Minsheng Bank, attributed the record low M2 growth partly to a high comparative basis in the same period last year.

Last April, the PBOC channeled one trillion yuan to China Development Bank for redevelopment of shanty towns, Yicai.com quoted Wen as saying.

Despite this, there is room for more monetary policy maneuvers given the gap between the 10.1-percent M2 growth and the annual target this year, said Wen.

The historic low M2 growth provides "further evidence of generally tight, if not tightening monetary conditions" in China, according to HSBC's Wang.

"Monetary conditions" matter, according to HSBC, because they influence decisions by investors and consumers, and affect the output gap, economic growth and monetary policy.

"Although policy makers have stepped up easing efforts in recent months, so far this was too little to stabilize growth and ease disinflationary pressures," said Wang.

China's central bank cut interest rates by 25 bps starting Monday, the third rate cut in six months, in the face of inflationary pressure and economic headwinds.

"Policy makers will likely speed up policy banks' lending capacity, implement municipal bond issuance and mobilize fiscal deposits in the coming weeks," said Wang.

HSBC forecast another 25-bps interest rate cut in addition to the 50-bps RRR cut in Q3 after the PBOC stepped up monetary easing efforts with a 100-bps RRR cut and 25-bps rate cut in April.

Although not all of the easing measures in April were captured by the data released on Wednesday, monetary easing is still needed to catch up in the coming weeks, given the weak money supply growth and sharp deceleration in investment growth, according to Wang.

Fixed asset investment in China rose 12 percent from a year earlier to 12 trillion yuan in the first four months of the year, according to the National Bureau of Statistics on Wednesday.

It is the lowest reading in 15 years, according to the HSBC.