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RRR cut aims to boost morale

By Wang Fei’er (Global Times)

08:31, May 18, 2012

Following an announcement over the weekend that it would soon be cutting reserve requirement ratios by 0.5 percent at the nation's commercial lenders, a move which may inject 500 million yuan ($79.1 million) into the money market, the People's Bank of China (PBC) soaked up 64 billion yuan in liquidity this week via its normal open market operations.

With the recent move to drain liquidity suggesting that the interbank market is already flush with cash, the PBC's announcement that it will soon be slashing the RRR is likely more of a symbolic gesture meant to bolster market sentiment rather than a tactic to turn around the country's slowing economy, experts told the Global Times.

With China's GDP, manufacturing activity, foreign direct investment, net foreign exchange sales, imports and exports all showing signs of decrease last month, the country desperately needs to do something to keep the economy moving forward, and more liquidity via an RRR cut will likely give enterprises and investors more confidence, said Zhang Monan, an economics researcher from China's State Information Center.

Yet, falling interest rates in the interbank market continue to make it easy for banks to borrow from one another and illustrate that monetary supplies are already ample, said Li Bo, a senior analyst from Guangzhou-based GF Securities.

Many enterprises though are still disinclined to borrow from banks, as real lending rates usually run much higher than the benchmark set by the PBC, and also because faltering economic growth has discouraged them from seeking credit to expand their businesses, said Li.

New bank loans dropped by 9.86 percent year-on-year in April, down to 681.8 billion yuan, the PBC reported in May.

With a glut of cash but a lack of borrowers, it will take some time for the money market to digest the added liquidity from an RRR cut, and so the PBC has resorted to issuing repos as a short-term strategy to soak up inflows of money, Lu Zhengwei, chief economist from the Shanghai-based Industrial Bank, told the Global Times.

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