Room for further RRR cuts

But market liquidity must be taken into account, says central bank chief

China's central bank governor said on Monday that there is ample scope for further cuts in banks' required reserve ratio after it injected about 400 billion yuan ($63.2 billion) into the market by lowering the ratio by 50 basis points last month.

"Although theoretically the room for further cuts in the RRR remains very large, it might not be very necessary for us to do so, because we need to consider market liquidity conditions," Zhou Xiaochuan said at a news conference during the ongoing annual legislative session in Beijing.

He said market liquidity will be mainly affected by yuan positions for foreign exchange purchases and the balance of payments, neither of which was likely to change dramatically in the short term.

"A cut in the RRR should not be interpreted as a signal of monetary easing, because usually it is mainly related to the central bank's need to sterilize fluctuations in foreign exchange," Zhou said.

From the fourth quarter of 2010 to the third quarter of last year, the People's Bank of China hiked the RRR five times.

In December, the central bank cut the RRR by 50 basis points, the first cut since December 2008. On Feb 18, the bank announced another 50-basis-point cut in the ratio.

The central bank also pays close attention to other tools, especially interest rate adjustments, Zhou said. "But any new move on interest rates must take into account its influence on capital flows."

"The message conveyed by Zhou demonstrates very clearly that more RRR cuts are likely, with another two cuts for a total of 100 basis points in 2012," said Peter So, managing director at CCB International.

"As the stimulus effects fade and external demand normalizes, China's traditional growth engines have run out of steam. Without inventing new growth engines, policymakers may have to again rely on cyclical easing to rerun the old ones," said Shen Minggao, head of China Research of Citi Investment Research, part of Citigroup.

The reversal of policy and liquidity conditions should limit downside risk and revive market sentiment, he said.

China's export growth was below expectations in February, while import growth exceeded forecasts.

Exports grew 18.4 percent year-on-year and imports rose 39.6 percent. The trade deficit was $31.5 billion in February.

Overseas demand remained weak, as did domestic demand indicators, with slower growth for industrial production, fixed asset investment, retail sales and new yuan loans in February.

The Ministry of Finance said on Monday that China's fiscal revenue rose 13.1 percent year-on-year to 2.09 trillion yuan in the first two months, down sharply from 24.8 percent growth for all of last year.

"Last year, consumer price index inflation was running well above 6 percent, enough to trigger social unrest concerns. This was partly the reason for the extended period of monetary tightening.

"However, just because inflation is falling and activity is moderating, it doesn't mean that the monetary spigots are about to be opened," said Ashley Davies, analyst at the Germany-based Commerzbank AG.

The CPI came in at 3.2 percent in February, compared with 4.5 percent one month earlier.

Davies said despite these trends, policymakers would still resist significant easing, since their preference is to engineer weaker housing prices.

Liu Shiyu, vice-governor of the central bank, said it will maintain differentiated credit policies for property-related loans.

"We will make sure that individuals have access to loans when purchasing their first homes. But for (purchases involving) the so-called '10 percent down payment' advertised by a few developers, commercial banks cannot participate."

Davies forecast another 50-basis-point cut in the RRR by the end of the first half, with interest rates left on hold.

"If interest rates were to be cut, it would likely be limited to the 12-month lending rate as opposed to the deposit rate."

Contact the writers at wangxiaotian@chinadaily.com.cn and oswald@chinadailyhk.com

(China Daily 03/13/2012 page13)