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Li Wei, a Shanghai-based economist with Standard Chartered Plc comments on China’s central bank announcement today that it would cut banks’ reserve requirement ratio by 50 basis points. Li commented by e-mail.
On reasons behind the cut:
“This is a strong signal that Beijing has geared up its pro-growth policy stance. As stated in the People’s Bank of China’s first quarter monetary policy report, reserve repos (rather than reserve requirement ratio adjustments) will be used for short-term liquidity fine-tuning purposes. Hence, reserve requirement ratio adjustment has now become a stronger signal of a change in the policy stance than it was previously.
On China’s growth outlook:
‘‘The direct trigger of the RRR cut was the weak growth data for April released on 11 May. The slowdown is in line with our long-held, non-consensus view that China will face rising headwinds in the second quarter, and that GDP growth will slow to about 7.8 percent year-on-year in the quarter. Weaker-than- expected new loan growth in April also warrants more measures from Beijing to boost capital growth.
‘‘We remain optimistic about the growth outlook for the second half, barring a lasting, significant external shock. China’s economic fundamentals remain solid, reflected in the still-robust labour market and continued fast growth in wage income.
‘‘As a result, we expect a rather rapid growth recovery after enhanced policy easing by Beijing. Indeed, portfolio investors are likely to react positively to the reserve requirement cut when the market reopens.’’
On future moves by the Chinese central bank:
‘‘We forecast that the People’s Bank of China will reduce the reserve requirement ratio three more times in 2012, by a total of 150bps. The cut is likely to be supplemented by a relaxation of loan-to-deposit ratio regulations to boost loan growth.
On China’s yuan:
‘‘The RRR cut echoes our call for slower Chinese yuan (CNY) appreciation; we look for USD-CNY to reach 6.21 by end-2012. Export growth is moderating and the current account surplus is on a narrowing path.’’
To contact the reporters on this story: Liza Lin in Shanghai at email@example.com; Zheng Lifei in Beijing at firstname.lastname@example.org
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