* C.bank signals no monetary policy easing for now
* RRR cut will inject too much money to be absorbed by weak
* Last year similar speculation led to c.bank clampdown
By Lu Jianxin and Pete Sweeney
SHANGHAI, April 17 A string of weak
first-quarter economic data has provoked many China economists
to predict Beijing will loosen monetary policy to keep growth on
track, specifically by reducing banks' reserve requirements.
But dealers in China's money market aren't betting on it
The divide in opinion highlights the risk that foreign
investors, who have begun moving money into Chinese equities
recently, may not get the liquidity support they need to drive a
rally in China's long-underperforming equities markets in 2014.
But if the sceptics are right, it would mark a continuation
of a strategy launched in 2013, during which the People's Bank
of China relied almost entirely on short-term liquidity tools to
keep the economic engine ticking over while retaining the
ability to crack down on sloppy lending at short notice.
"The PBOC's signals have traders here firmly convinced that
an RRR cut is not coming, at least not in the second quarter of
this year," said a dealer at an Asian bank in Shanghai.
"The new government that came into power one year ago
appears determined to carry with its plans to adjust China's
economic structure with less investment and asset bubbles."
Traders also noted that similar predictions about imminent
cuts in the reserve requirement ratio (RRR) circulated in the
markets during the same time in 2013 after an uninspiring first
quarter, but those never materialised, and the PBOC went on to
dramatically tighten money instead in June.
Beijing has been giving mixed messages this year as well. On
the one hand, leaders have committed to keeping liquidity
adequate to support growth. But at the same time they have
signalled they are ready to start letting indebted firms in
overcapacity industries default on bonds and go bankrupt.
"Companies complaining they are short of money are either
liquidity intensive companies, such as property firms, or those
which rely on borrowing new money to roll over old debt," the
Financial News, a newspaper run by the PBOC, said in a
commentary in late March.
"If the PBOC release money via an RRR cut now, liquidity
will flow to such companies. As a result, property prices will
continue rising and overcapacity in sunset sectors will worsen."
The argument for further loosening this year is simple:
China's exports have slid, manufacturing growth appears
stagnant, and at the same time credit and money creation has
"We believe that economic momentum may have stalled
temporarily in March," wrote Nomura economist Zhang Zhiwei in a
research noted dated April 10.
"If growth slows again in May, which is our baseline case,
the government may loosen policy further, particularly on the
Analysts have noted that the central bank has allowed
benchmark short-term rates to sink back below 4 percent since
February, implying regulatory relaxation after a tough 2013.
Indeed, benchmark rates remained low this week, with the
weighted average of the benchmark seven-day repo
staying at a comfortable 2.74 percent on Thursday, its lowest
level since mid-March. Traders believe any rate below 4 percent
indicates relatively accommodative liquidity conditions.
On Wednesday, the PBOC relaxed the reserve requirement
ratios at rural banks, an economically insignificant move.
But some believe that Beijing will do more. The next, more
drastic step would be to unleash the hundreds of billions of
yuan currently trapped in Chinese banks by Beijing's mandatory
reserve requirements, some economists say.
TOO MUCH OF A GOOD THING
A typical RRR cut by the PBOC is usually 50 basis points,
but a single cut would pump about 550 billion yuan ($89 billion)
base money into China's monetary base.
If one applies a four-time money multiplier effect to that
injection, it would add 2.2 trillion yuan in fresh cash in
circulation in the banking system.
But enduring weak demand within China, together with a huge
existing 116 trillion yuan in broad M2 money supply, means that
a further injection would likely flow into industries full of
firms struggling to stay afloat such as property and steel,
prolonging industrial overcapacity.
"A base money injection via an RRR cut at the present market
conditions will do nothing to help the economy but will push up
prices of speculative assets," said a senior trader at a Chinese
state-owned bank in Shanghai.
"The PBOC has far from exhausting handy tools, so it will
first resume reverse repos in open market operations,
supplemented by other similar tools such as re-lending,
re-discount and SLFs (short-term lending facilities) before it
will resort to RRR or rate cuts."
(Editing by Chris Gallagher)