Tue, Mar 17, 2015 - Page 14 News List

Analysts expect China to reduce reserve rate ratio

LIMITED LIQUIDITY:People’s Bank of China Governor Zhou Xiaochuan said that the country’s money supply growth was appropriate, despite slowing GDP growth


The cost of borrowing in China’s interbank market is the most expensive on record for the start of a year. That suggests that the People’s Bank of China (PBOC) is not finished easing policy.

The seven-day repurchase rate was 4.41 percent on average so far this year, up from 4.16 percent a year earlier and the highest for the period since the fixing began in 2004.

Australia & New Zealand Banking Group Ltd and AXA Investment Managers Ltd foresee a reserve-requirement ratio cut this month, while Barclays Plc predicts one “in the coming weeks.”

Two benchmark interest-rate reductions and one lowering of banks’ reserve ratios in four months failed to bring borrowing costs down, as the second-largest economy in the world faces capital outflows that drain cash.

Chinese Premier Li Keqiang (李克強) on Sunday told reporters that policymakers will act if growth, which the government targeted at about 7 percent this year, drifts toward the lower limit of its range and cuts into employment or wages.

“I’m in the camp expecting a reserve-requirement cut,” Rajeev De Mello, who manages about US$10 billion as head of Asian fixed income at Schroder Investment Management Ltd in Singapore, said in an interview on Thursday last week.

“Interbank rates are not showing any signs of coming down. That worries me a bit because that shows liquidity in China is still very tight,” he said.

Schroder has been buying onshore five and 10-year sovereign bonds because it expects yields to fall as the economy slows, De Mello said.

The asset manager sees a 50 basis-point cut in the required reserve ratio.

The yield on 2020 government notes fell 23 basis points this year to 3.283 percent as data on factory output and retail sales released in the past week trailed estimates. The one-year interest-rate swap, the fixed cost to receive the floating repo rate that indicates cash availability, climbed 20 basis points this year and touched a six-month high of 3.7 percent on Monday last week.

Industrial production rose 6.8 percent in the January-February period from a year earlier, compared with the 7.7 percent median estimate in a Bloomberg survey, official reports showed Wednesday last week. Retail sales increased 10.7 percent, shy of the 11.6 percent forecast.

“What these data represent is that the economy is slowing,” Mirza Baig, Singapore-based head of foreign exchange and interest-rate strategy at BNP Paribas SA, said in a telephone interview on Thursday last week. “Overall financial conditions are tight for the economy and bode well for more easing. We are expecting a reserve-ratio cut so that money-market rates can normalize.”

Not all of China’s economic indicators were bad. Exports grew more than 48 percent last month, distorted by the Lunar New Year holidays. That beat an estimate of 14 percent.

Aggregate financing, the broadest measure of new credit, was a forecast-beating 1.35 trillion yuan (US$215.7 billion).

M2 money supply rose 12.5 percent from a year earlier, compared with the forecast of 11 percent.

The nation’s money supply growth is appropriate and a new normal of slower economic expansion does not mean there will be a switch from a prudent policy stance, PBOC Governor Zhou Xiaochuan (周小川) said in Beijing on Thursday last week.

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