China may cut banks’ reserve requirements before the end of this year to stoke lending to small companies and boost the economy, said Guotai Junan Securities Co., Mizuho Securities Asia Ltd. and Barclays Plc.
The central bank may reduce interest rates by the second quarter of next year as inflation eases “significantly,” Wang Jin, an analyst at Shanghai-based Guotai Junan, said in a report yesterday after Premier Wen Jiabao announced the government may fine-tune its economic policies as needed.
Wen’s comments fueled speculation the government is ending a two-year policy tightening campaign as economic growth slows, inflation eases and property sales slump. The benchmark Shanghai Composite Index rose 0.3 percent to 2,435.62 at the close, capping a four-day, 5.1 percent gain.
“There’s no possibility that policies will be tightened now after the premier’s hints,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “The inflection point for inflation has arrived. All these things will help valuations expand from the current extremely low levels.”
China’s stocks have gained this month as reports showing easing inflation and slowing economic growth spurred the government to introduce measures including tax breaks and easier access to loans to help smaller companies. The benchmark gauge has lost 13 percent this year, adding to a 14 percent slump in 2010, as the central bank ordered lenders to set aside reserves to tame inflation that reached a three-year high of 6.5 percent in July. The reserve-requirement ratio for large banks is at a record high of 21.5 percent.
The nation’s gross domestic product rose 9.1 percent in the third quarter, the least in nine quarters, while consumer prices rose 6.1 percent in September, compared with 6.2 percent in August. Government bonds and the yuan also rose yesterday.
Officials will make adjustments at a “suitable time and by an appropriate degree” and will maintain “reasonable” growth in money supply, Wen said during a visit to Tianjin, according to a statement published on the government’s website on Oct. 25.
China may cut the reserve-requirement ratio for small banks first to help small companies, according to Barclays and Guotai Junan. Premier Wen announced government support for smaller companies during a visit to the eastern city of Wenzhou earlier this month after media reports highlighted a credit squeeze that has driven businesses to the so-called shadow banking system to obtain loans.
“Our view has been that we would not rule out an RRR cut towards year-end and think an RRR cut for smaller banks, which have more exposure to SMEs, could happen first as was the case in late 2008,” Yiping Huang, Jian Chang and Lingxiu Yang, Hong Kong-based economists at Barclays, wrote in a report.
Small enterprises and companies involved in public housing may benefit from a “modest policy easing,” Deutsche Bank AG’s chief China economist Ma Jun said in a report today. The government may resume construction of suspended railway projects next year, he said.
Premier Wen’s comment reflects the government’s concern about the slowdown in economic growth, said Wang of Guotai Junan, China’s top-ranked arranger of domestic corporate bond sales, according to Bloomberg data.
China may “fine-tune” open market operations and relax credit instead of cutting interest rates or reserve ratios, the China Securities Journal said today in an editorial.
It’s necessary to continue tight housing policies as expectations remain strong for home price gains, said the journal, owned by the official Xinhua News Agency.
China may be ready to lower reserve ratios in small steps, combined with increases in interest rates, Credit Suisse Group AG economist Dong Tao said in a report yesterday. The government may allow more lending to small companies and infrastructure projects that are desperate for funding, while keeping its overall policy stance intact, he said.
“Loosening signals are getting louder and clearer,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities, wrote in a note yesterday. Wen’s comments are “acknowledgment of a growing liquidity crunch in the economy,” Shen said.
— With assistance by Shidong Zhang, and Allen Wan