Bloomberg News

China Set to Add to Reserve-Ratio Cuts as Prices Deter Rate Move

February 19, 2012

Feb. 20 (Bloomberg) -- China is seen making more cuts to banks’ reserve requirements to fuel lending and sustain economic growth as the housing market cools and Europe’s sovereign-debt crisis weighs on exports.

The proportion of cash that lenders must set aside will fall half a percentage point from Feb. 24, the central bank said Feb. 18 on its website. Standard Chartered Plc forecasts at least three more reductions this year, while HSBC Holdings Plc sees a minimum of two.

The ruling Communist Party aims to sustain the nation’s expansion without undermining a campaign to tame inflation that saw home prices drop in 47 of the 70 biggest cities in January. Policy makers may refrain from interest-rate cuts until nearer mid-year when consumer-price gains have slowed to below 3 percent from 4.5 percent last month, HSBC economist Qu Hongbin said yesterday in Hong Kong.

“We expect further easing measures from Beijing in the coming months, such as bigger new loans and at least two additional 50 basis point reserve-ratio cuts,” Qu said. Interest rates will “remain a secondary monetary policy tool.”

The Shanghai Composite Index gained for five weeks ahead of the announcement, the second reduction in reserve ratios in three months, partly on speculation easing was imminent.

A 50 basis-point cut may add 400 billion yuan ($63 billion) to the financial system, according to Australia & New Zealand Banking Group Ltd. UBS AG says the move frees up about 350 billion yuan and may have been triggered by tight interbank liquidity. The previous reduction was the first since 2008.

Property Slowdown

Data reported the day of the central bank announcement showed the effect of government curbs to deflate property bubbles and make housing more affordable. Prices failed to rise in any of the 70 cities, according to the statistics bureau.

A deteriorating outlook for the European Union and a “sharper-than-expected” deceleration in property investment in China are the biggest risks for the economy, according to Chang Jian, a Hong Kong-based economist at Barclays Capital Asia Ltd. who previously worked for the World Bank. Chang predicted two more reserve-ratio cuts this year and no change in rates, adding that the government has more room to use fiscal policy to support growth.

A central bank estimate that M2, the broad measure of money supply, will increase 14 percent this year implies that reserve ratios must fall further, according to analysts at lenders such as China Construction Bank Corp. The latest reduction means the nation’s largest lenders must set aside 20.5 percent of deposits, down from 21 percent, based on previous statements.

Signs of Strength

While some economists had predicted a cut before last month’s Lunar New Year holiday, the People’s Bank of China instead used reverse-repurchase contracts to add money to the financial system.

China follows Japan in expanding monetary easing even as global equity markets are buoyed by signs of strength in the U.S. economy and optimism that Europe’s fiscal crisis will be contained. In the U.S., the Standard & Poor’s 500 Index has climbed to near the highest level since 2008 after that nation’s jobless rate fell and as Greece moved closer to securing another bailout.

“Chinese policy makers are very much concerned about a possible deeper slowdown in domestic growth,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA.

Volkswagen AG, Europe’s largest carmaker, says sales in China, the company’s biggest market, fell 4.5 percent last month. Gross domestic product grew 8.9 percent in the fourth quarter from a year earlier, the slowest pace since the first half of 2009.

Elevated Inflation

Inflation was at a three-month high last month, boosted by holiday spending, while exports and imports fell for the first time in two years and new lending was the lowest for a January in five years.

While China’s commerce ministry describes the trade outlook as “grim,” Vice President Xi Jinping said Feb. 17 that there will be no “hard landing” for the world’s second-biggest economy.

Before the reserve-ratio move, Premier Wen Jiabao had said that “fine-tuning” of policies was needed this quarter, with the economic conditions deserving attention.

“We have to make a proper judgment as early as possible when things happen and take quick action,” Wen was cited as saying in a Xinhua News Agency report published Feb. 12.

Before the central-bank announcement, Ken Peng, a Beijing- based economist at BNP Paribas SA, said the Chinese government needs to be “careful not to overshoot monetary loosening, as it did in the financial crisis.”

Besides inflation risks, lingering effects of record lending in 2009 and 2010 include the danger that local- government financing vehicles will default, saddling banks with bad loans.

--Zheng Lifei, with assistance from Feiwen Rong and Li Yanping in Beijing. Editors: Paul Panckhurst, Nicholas Wadhams

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

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


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