Bloomberg News

China May Cut Reserve Ratio for Smaller Banks, Mizuho Says

October 26, 2011

(Updates to add economist’s comment in fourth paragraph.)

Oct. 26 (Bloomberg) -- China may reduce reserve requirements for small and medium-sized lenders in November to help bolster economic growth, said Shen Jianguang, a Hong Kong- based economist at Mizuho Securities Asia Ltd.

His comments follow Premier Wen Jiabao’s statement yesterday, during a visit to Tianjin, that officials will “fine-tune” policies at a “suitable time and by an appropriate degree.”

Stocks in China rose for a third day as Wen’s comments fueled speculation the government will ease constraints on lending that threaten to slow expansion in the world’s second- biggest economy. The premier has made four tours across the nation this month where he called for policy support for small businesses, exporters, consumers and job seekers.

“Loosening signals are getting louder and clearer,” Shen, who previously worked at the International Monetary Fund, wrote in a research note today. Wen’s comments are “acknowledgement of a growing liquidity crunch in the economy” and indicate “targeted easing for small and medium-sized companies and local government financing vehicles,” Shen said.

The benchmark Shanghai Composite Index gained 0.7 percent to 2,427.48 at the close, capping a three-day 4.8 percent rise.

Government agencies including the banking regulator, industry and finance ministries this week announced measures to help smaller companies after the State Council’s pledge on Oct. 12 to boost support for businesses that have been hardest hit by the government’s tightening measures.

Credit Squeeze

Wen visited eastern Zhejiang province on Oct. 3 and 4 after media reports highlighted a credit squeeze that has driven private businesses to the informal lending market to obtain loans.

He then went to Guangdong, the nation’s biggest exporting region, where he pledged to keep the yuan stable to help trading companies. In southern Guangxi province he called for more focus on employment and people’s welfare. Finally, in Tianjin this week he said economic policies will be fine-tuned while the focus on stabilizing prices will remain the top priority.

Wen’s latest speech “is the first one that explicitly signals policy shift”, Yao Wei, a Hong Kong-based economist at Societe Generale SA, wrote in an e-mailed note today. “More easing is around the corner” and economic data released next month may prompt a reduction in reserve requirements for smaller banks, she said.

Monetary authorities may cut the reserve requirement ratio for all banks toward the end of this year when inflation drops to around 4 percent and when a “more obvious turning point” appears in the property market, Mizuho’s Shen said.

Inflation Campaign

A reduction totaling 100 basis points is likely in the next six months, Tao Dong, a Hong Kong-based economist with Credit Suisse AG, wrote in a note today.

The People’s Bank of China raised banks’ reserve requirement ratios nine times from November to June to a record 21.5 percent for the biggest lenders. The rate for smaller lenders is 19.5 percent, according to Bloomberg data compiled based on previous central bank announcements.

The central bank also increased interest rates five times between October and July as part of the government’s campaign to rein in consumer and housing prices.

Inflation eased to 6.1 percent last month from a three-year high of 6.5 percent in July. Consumer-price gains have exceeded the government’s 2011 target of about 4 percent every month.

Economists differ on the outlook for interest rates. The benchmark one-year lending rate is 6.56 percent and the deposit rate is 3.5 percent.

Limited Easing

“Rate cuts are a low probability in the near term,” Societe Generale’s Yao wrote today, while Credit Suisse’s Tao said he “wouldn’t be surprised” to see an increase in interest rates as the central bank seeks to limit the scale of easing.

Guotai Junan Securities Co. China’s top-ranked arranger of domestic corporate bond sales, said today the central bank may cut interest rates in the second quarter of next year.

Gross domestic product expanded the least in two years in the third quarter, export growth was the smallest in seven months in September and expansion in M2, the broadest measure of money supply, was the lowest in almost a decade, government reports showed this month.

--Li Yanping. Editors: Nerys Avery, Richard Frost

To contact Bloomberg News staff for this story: Li Yanping in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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