No need to boost liquidity

The Chinese economy is not doing very well, if the growth rate is considered.

Earlier figures have shown that trade, fixed-asset investment, industrial output, manufacturing and retail were far from robust. Most analysts now believe that the first-quarter GDP growth, which is scheduled to be announced on April 16, would stand at between 7.2 and 7.4 percent, missing the yearly goal of 7.5 percent.

Calls are growing for the central bank to lower the reserve requirement ratio (RRR) for lenders to propel the economic growth.

But there is not an urgent need to slash the RRR, and there are three reasons.

First of all, the economic slowdown is not alarming. The current slowdown is a result of a combination of factors such as the government's frugality campaign and costs of economic restructuring. It can be seen as a short-term pain in a tradeoff for long-term benefit. So long as the fundamentals do not shaken, there is no need to resort to monetary loosening to shore up the economic growth.

Passing the test of 2008-09 global financial crisis, the Chinese economy has grown more resilient to slower growth. Its trade sector, for example, has got used to operating in a thin profit margin.

The labor market, a major concern of both policymakers and general public, became more tolerant toward manufacturing slowdown. Last year, China's newly created jobs outnumbered that in the previous year, even though the economy grew slower. China's working-age population is shrinking in the past two years, a significant demographic change that reduces the pressure of employment. In addition, a growing service sector means the country does not need to maintain that high degree of growth in the manufacturing sector to boost employment rate. What actually haunts the labor market is the structural imbalance that sees a shortage of skilled labor but partially oversupply of entry-level service workers. In this sense, the task is not to aggressively boost the sheer size of GDP, but to boost the service sector.

Second, the market liquidity is not tight, so there is little need to reduce the RRR. The Overnight Shanghai Interbank Offered Rate, a major measurement of borrowing costs, stayed below 3 percent in most of the time in March and April, showing that funding is relatively inexpensive, at least for now. Yu'ebao, a popular online money-market product run by Alibaba, offers a yield of a bit more than 5 percent, coming down from nearly 7 percent in the beginning of the year. This also points to an ample liquidity in the market, giving little reason for a drop in the RRR ratio.

Third, if the central bank reduces the ratio, the market may take it as a signal of monetary loosening. This will do no good to policymakers' effort to deleverage the economy.

Since the central bank maintain a tough stance toward credit crunch in the middle of last year, the market has anticipated that the tightening circle will be long-term. Based on that belief, lenders prudently hand out loans. This year, banks and shadow banking agencies gradually shun high-risk sectors such as property, coal, cement and steel. Coupled with measures such as short-term depreciation of the yuan, the tightening has helped drive liquidity from the financial sector to real-economy sectors.

If the RRR is lowered, however, more money will be pumped into the market. Too much liquidity is likely to lead to a lending spree that dampens the success already achieved.

But it is not to say the RRR should always be maintained at the current high level.

A decrease of the ratio is needed if the market liquidity drains quickly in changing situation. For example, if too much money flows out of China, as reflected by decrease in foreign exchange purchases, the RRR should be lowered to make sure duely sufficient liquidity is ensured.

The author is a Shanghai-based financial analyst.