China RRR Cut Just 'Fine-Tuning,' More to Come in 2012: Analysts
The Chinese central bank's move to boost economic growth by cutting the reserve requirement ratio (RRR) by 50 basis points over the weekend, for the second time in almost three months, is part of its "fine-tuning" of monetary policy, say analysts who expect more such easing in 2012.
Several analysts told CNBC that while they don't expect interest rate cuts this year, further RRR easing of between 100 and 300 basis points is likely to support credit growth, even as inflationary pressures remain.
Brian Jackson, Senior Emerging Markets Strategist at Royal Bank of Canada, said Saturday's RRR cut is a sign that China's policymakers are making growth a priority, while still keeping an eye on inflation .
"They want to make sure that growth doesn't tank too aggressively, but on the same hand they also want to make sure that inflation pressures don't pick up again," Jackson said. "So I think this is sort of the middle course, just fine-tuning policy."
With China undergoing a leadership transition this year, Jackson says authorities will aim to keep economic policy as stable as possible.
Weak new bank loan data in January, which came in at $117 billion, below market forecasts of $158 billion, is one of the major reasons behind the People's Bank of China's decision to cut the reserve ratio now, according to Liu Li-Gang, Head of China Economic Research, ANZ.
"I think the biggest worry for them [central bank] is that the loan growth so far has been quite anemic and we have seen in January China's total social financing figure, it fell by close to 50 percent, suggesting that at this moment the monetary conditions are still quite tight in China," Liu said.
Social financing is an indicator published by the PBOC to measure aggregate financing in the real economy. It comprises loans, commercial paper, bonds, stocks and other instruments.
Liu says a more relaxed monetary policy will see state-owned sectors and large firms benefit immediately from the increased liquidity. He also expects small and medium-sized businesses to do better with more credit.
Liu expects to see up to four more RRR cuts this year totaling 200 basis points, while Jackson forecasts 200 to 300 basis point cuts in 2012.
Liquidity to Spur Inflation
While Frederic Neumann, Co-Head of Asian Economics Research at HSBC, also anticipates at least two more RRR cuts of 50 basic points each this year, he warns that if concerns over growth replace concerns over inflation it could be a "deteriorating trade-off."
"Aggressive monetary easing — that is if China overplays its hand — could stoke more general inflation and might even re-ignite a liquidity driven rally in the stock market," Neumann said.
"For the time being, growth is rightly the overriding concern in China. However, inflation risk lurks right beneath the surface and it may not take much easing before price pressures rebound."