RRR cut right move in cur­rent eco­nomic sit­u­a­tion

Global Times - - Bizcomment - By Zhang Ming The au­thor is chief econ­o­mist at Ping An Se­cu­ri­ties and a re­search fel­low at the In­sti­tute of World Eco­nom­ics and Pol­i­tics un­der the Chi­nese Acad­emy of So­cial Sciences. bi­zopin­ion@ glob­al­times.com.cn

China re­cently de­cided to cut the re­serve re­quire­ment ra­tio (RRR) by 100 ba­sis points, which will take ef­fect on Mon­day.

This is the fourth time this year the Peo­ple’s Bank of China (PBC), the cen­tral bank, has low­ered the RRR. The RRR for small to medium-sized and large de­pos­i­tory fi­nan­cial in­sti­tu­tions will have dropped to 12.5 per­cent and 14.5 per­cent, re­spec­tively. The move is ex­pected to pump an­other 750 bil­lion yuan ($108 bil­lion) into the mar­ket.

One rea­son for this ad­just­ment is to lower the fi­nanc­ing costs for small and medium-sized en­ter­prises (SMEs) to sup­port the de­vel­op­ment of the real econ­omy. An­other is to bet­ter struc­ture the liq­uid­ity in com­mer­cial banks and fi­nan­cial in­sti­tu­tions.

The lat­est RRR cut is based on the cur­rent eco­nomic sit­u­a­tion. There has been a slow­down in growth and the GDP growth rate is ex­pected to fall to 6.6 per­cent in the third quar­ter this year and 6.4 per­cent in the fourth quar­ter.

The US-China trade row is likely to con­tinue weak­en­ing the ex­port sec­tor’s con­tri­bu­tion to GDP growth and this will im­pact man­u­fac­tur­ing in­vest­ment. The curbs on ex­ces­sive growth in the real es­tate in­dus­try will lead to a grad­ual re­duc­tion in in­vest­ment. The spe­cial bonds lo­cal gov­ern­ments are al­lowed to is­sue will only mildly spur the in­crease of in­vest­ment in in­fras­truc­ture.

The dif­fi­culty SMEs face in rais­ing funds is the rea­son for the RRR cut at the fi­nan­cial level. The pre­vi­ous RRR cuts were also in­tended to chan­nel more liq­uid­ity to SMEs, but com­mer­cial banks are in­clined to cut sup­port for SMEs amid the cur­rent tight­ened fi­nan­cial reg­u­la­tion and stricter su­per­vi­sion of non-stan­dard debt as­sets.

So in the past few months, the growth rate of ag­gre­gated fi­nanc­ing for the real econ­omy has been lower than the growth of yuan-de­nom­i­nated loans, and M2 growth has out­run that of M1. This in­di­cates that it is get­ting harder for SMEs to raise funds. Cut­ting the RRR alone can­not solve this prob­lem. Other sup­port­ing mea­sures and a more vig­or­ous eq­uity mar­ket are also needed

The RRR cut also re­flects a be­lief that in­fla­tion will not be a ma­jor threat in the short term. Some re­cent events have pointed to a pos­si­ble in­crease in in­fla­tion, in­clud­ing a rise in oil prices, the flood in Shouguang in East China’s Shan­dong Prov­ince, the out­break of African swine fever, the US-China trade row and the rise in rents in first-tier cities. But these are mainly sup­ply­side shocks with­out much de­mand-side in­flu­ence, so their im­pact on in­fla­tion will not last. The Con­sumer Price In­dex (CPI) may rise to 2.5 per­cent in the near fu­ture, but it is un­likely to rise by much more. And though there are con­cerns about the in­fla­tion threat from re­bound­ing food prices, this will be far down the road.

The PBC has stressed that the RRR cut will not put de­pre­ci­a­tion pres­sure on the yuan. In fact, as the US Fed­eral Re­serve con­tin­ues to raise in­ter­est rates, the PBC’s at­ti­tude shows that it is de­ter­mined to main­tain the yuan-to-dol­lar ex­change rate at a cer­tain level, and it is putting do­mes­tic pol­icy goals above ex­ter­nal goals. The re­sump­tion of counter-cycli­cal fac­tors in Au­gust has re­in­forced the PBC’s abil­ity to con­trol the cen­tral par­ity rate. The mea­sures to con­strain cap­i­tal out­flows have been strength­ened. Plus, the PBC still main­tains cer­tain con­trols on FX re­serves and the off­shore mar­ket. There­fore, the chance of the yuan weak­en­ing be­yond 7 to the dol­lar is slim.

An­other sup­port­ing con­di­tion for the PBC to push through the RRR cut is that the real es­tate in­dus­try has been brought un­der con­trol. Hous­ing prices in third- and fourth-tier cities have fallen due to curbs on shan­ty­town re­de­vel­op­ment.

Tight­ened con­trols on bank loans have also cooled the hous­ing mar­ket in sec­ond-tier cities and the trade vol­ume for prop­er­ties in the first-tier mar­ket has been luke­warm. Prop­erty taxes on houses also af­fect the ex­pec­ta­tions of the mar­ket. As long as the real es­tate reg­u­la­tions do not loosen up, the RRR cut will not re­heat the hous­ing mar­ket.

After this RRR cut, it is un­likely the PBC will cut the rate again be­fore the be­gin­ning of next year.

The RRR cut also re­flects a be­lief that in­fla­tion will not be a ma­jor threat in the short term. Some re­cent events have pointed to a pos­si­ble in­crease in in­fla­tion. But these are mainly sup­ply-side shocks with­out much de­mand-side in­flu­ence.

Il­lus­tra­tion: Luo Xuan/GT

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