20 May 2019
Liang Hong says  targeted RRR cuts have not been useful in helping corporates get financing. Photo: EJ Insight
Liang Hong says targeted RRR cuts have not been useful in helping corporates get financing. Photo: EJ Insight

China likely to switch to comprehensive RRR cuts

China’s central bank is likely to cut interest rates and the reserve requirement ratio (RRR) for commercial banks across the board to boost liquidity in the coming year, China International Capital Corp. (CICC) said on Thursday.

That’s a departure from the policy of targeted easing this year, it said.

“Monetary policy is a tool to control the aggregate amount. Targeted measures are not transparent and do not give a clear signal on monetary policy,” said Liang Hong, CICC chief economist and head of research.

China has carried out two rounds of targeted RRR this year.

In April, the People’s Bank of China (PBoC) cut RRR for county-level rural commercial banks by 200 basis points and that of rural credit cooperative unions by 50 basis points.

However, the market became aware of these developments only from the media.

It was not sure about which banks were eligible for targeted RRR cuts and the duration of the measures, she said.

The mini stimulus was then extended to smaller commercial banks such as China Minsheng Bank Co., China Merchants Bank Co. and Industrial Bank Co in June, which saw a 50-basis-point cut in RRR.

Liang said targeted RRR has not been very useful. Aggregate financing to the real economy and M2 money supply have fallen.

“The difficulty and high cost for corporates in getting financing have not been solved… Monetary policy has to go back to its principles”, she said.

Last month, the PBoC cut the one-year benchmark deposit rate by 25 basis points to 2.75 percent and the lending rate by 40 basis points to 5.6 percent 

It is expected to further lower the deposit rate by 25 basis points once more and slash RRR by a total of 200 basis points four times next year, Liang said.

Meanwhile, Wang Hanfeng, CICC executive director for research, said the A-share market and the Hong Kong equity market should grow 20 percent in 2015.

The growth will be driven by higher corporate earnings and stronger valuations, he said.

But the H-share market is likely to have higher returns than A shares due to its cheaper valuation.

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EJ Insight reporter

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