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Aid to rural lenders may portend wider easing
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AFTER a recent meeting chaired by Premier Li Keqiang, the State Council announced a lowering of the deposit reserve requirement ratio for qualified county-level rural commercial banks and rural cooperatives. The focus of the meeting was to increase financial support to the agriculture sector. The State Council also said that the government would increase credit support for the rural sector.
We view this move as another targeted easing measure to support a specific sector and boost market sentiment. It is consistent with our view that more supportive measures are warranted to stabilize growth.
The direct impact of this cut in the deposit reserve requirement ratio on the overall banking system and liquidity will be limited, in our view. Total liabilities of rural financial institutions stood at 18.6 trillion yuan (US$2.9 trillion) as of February 2014, compared with total banking system deposits of 109 trillion yuan in China.
We see increasing prospects of a broader cut in the reserve ratio in the second quarter, though this is still not our baseline. In November 2011, the People’s Bank of China lowered reserve requirement ratios for some rural cooperatives, and this move was followed by a cut for the whole banking sector in December 2011.
However, we note that the central bank has changed its liquidity management framework since June 2012, actively using open market operations and, specifically, reversing repos to inject liquidity.
In our view, while the People’s Bank of China is flexible in its fine-tuning and likely has a neutral-easing bias, it would prefer not to ease aggressively unless there are significant capital outflows or economic growth weakens further. It is also not clear that the extra liquidity following a broad-based cut in the deposit reserve requirement ratio would be used productively.
Meanwhile, Premier Li reiterated at the Boao Forum on April 10 that his government is not considering any strong stimulus measures or policies that would risk increasing the fiscal deficit. At the same time, he reaffirmed that it will push through reform in order to support economic growth. He said that a growth rate a bit higher or lower than 7.5 percent is normal and within a reasonable range.
The official China Securities Journal also said that the central government will unveil more policy measures to stabilize growth, focusing on the services sector, boosting growth in underdeveloped areas, consumption and exports, mainly in processing trade.
The intent is to create a more open and level playing field for companies.
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