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Interest rates cut looking less likely

Economists are expecting China to trim banks' reserve requirement soon to further free up liquidity to back economic growth.

The People's Bank of China is expected to scale back the reserve requirement ratio rather than cut interest rates, they said.

The central bank has fewer central bank bills due next month, making it more likely to free up liquidity by cutting the reserve requirement, Xu Hong, a Datong Securities Co researcher, said yesterday.

The central bank has central bank bills due worth 821 billion yuan (US$120 billion) this month, the biggest inflow of capital since May last year.

But it will be less next month, leaving space and need for cutting reserve requirement, Xu said.

Central bank bills are short-term bonds used to soak up liquidity from commercial lenders.

Issuing central bank bills in the open market and adjusting the reserve requirement are major means of adjusting liquidity.

Cutting the reserve requirement can help support a bank's credit growth, market watchers say.

Each cut of 0.5 percentage point of reserve requirement represents a total of 249 billion yuan for the banks, said Kang Hongtao, a Guoyuan Securities Co analyst.

China's new yuan lending grew by 2.69 trillion yuan in the first two months of this year, already more than half the country's 5-trillion-yuan whole-year target. This month's credit is expected to slow down.

Premier Wen Jiabao last week said the country's 8-percent growth target was "difficult but possible," adding that the government could add stimulus measures at any time.

The People's Bank of China has "further scope for expansionary monetary policy," the World Bank said in a report earlier this week, without making forecasts for interest rates or bank reserve requirements. Yi Gang, deputy governor of the central bank, said in a China Finance report earlier this week that the central bank, when adjusting rates, would factor in households' interest as deposits are key for them.

The market understood that to mean immediate interest rates cuts were less likely.

China has cut its interest rates five times since September when the global financial crisis worsened.


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