China could cut RRR in half in 2-3 years: Credit Suisse

June 18, 2015 19:02
Vincent Chan expects two cuts in the RRR this summer. Photo: HKEJ

It would not be surprising if China were to cut the required reserve ratio (RRR) for banks by half, to about 9 percent, in the next two or three years to boost the economy, Credit Suisse research analyst Vincent Chan said Thursday.

China’s RRR is 18 percent and would still be much higher than that of all the other major economies even if were cut in half, Chan told a media briefing.

In comparison, the United States has no such requirement, while the RRR in the eurozone is 1 percent, Japan's is 0.76 percent, and Russia's and India's are about 4 percent.

During China's years of rapid economic growth, the government used a high RRR to control bank lending.

However, as the demand for bank loans drops amid a sluggish economy, control by the administration is becoming weaker, Chan said.

He said that the country is facing short- to mid-term deflationary pressures.

Chan expects two cuts in the RRR, by 25 basis points (0.25 percentage point) and 50 basis points, this summer and the interest rate to decrease by 200 basis points in within two years.

The money released may go to infrastructure investment, as the sector is now one of the few engines for growth in China’s economy, he said.

In other comments, Chan said it’s only a matter of time before the bubble on the mainland’s Growth Enterprise Market bursts.

Prices of small-cap stocks in the mainland and Hong Kong markets are "crazy”, he said.

Chan said the Hong Kong stock market will definitely be affected, although to a smaller degree, when the crash begins.

The analyst favors large-cap H shares but suggests investors stay away from concept-driven stocks.

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EJ Insight reporter