China Holds Off Reserve Ratio Cut

Despite speculation about a drop in the bank reserve ratio due to high money demand for the Lunar New Year, China held off a reduction in the bank reserve requirement. Prior to this speculation, there was one cut in the reserve requirement, which was the first since 2008. Reserve ratios are used as a tool to curb inflation. This decision comes amid the property market slowdown and the weakest export growth since 2009. Bloomberg reports:

 “The central bank aims to ease policies prudently and pace loan growth at the beginning of the year so as to avoid a replay of the credit explosion in 2009 and 2010 and prevent inflation from rebounding,” said Lu Zhengwei, a Shanghai-based economist at Industrial Bank. Lu now sees a reserve-ratio cut in February to add liquidity and spur growth after the reverse-repurchase contracts expire.

Some analysts backed away from their reserve-ratio predictions when they saw the central bank inject 353 billion yuan ($55.7 billion) into the financial system in the week before the holiday, using the 14-day contracts. Barclays said the move had an effect similar to a cut in the bank requirements.

Postponing a reserve ratio cut indicates monetary easing “is meant to be moderate and controllable,” Hong Kong-based JPMorgan economists led by Zhu Haibin wrote in a Jan. 20 report after forecasting a pre-festival move in a Jan. 17 report. A cut “in the coming weeks” remains likely because market liquidity will be tight when the 14-day reverse repurchase contracts mature, they said.

The central bank is allowing the nation’s five biggest lenders, including Industrial & Commercial Bank of China, to increase first-quarter lending by a maximum of about 5 percent from a year earlier, two people at state lenders said previously.

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