Stephen Green, Hong Kong-based head of Greater China research at Standard Chartered Plc, comments on the People’s Bank of China’s announcement that it will cut the reserve requirement for the nation’s lenders by 0.5 percentage points from Dec. 5.
“Our analysis suggests liquidity will get tight at the end of December so the PBOC is front-running that, probably wanting to make sure banks had enough spare funds to lend out in December.”
“The public nature of this move - a move that would have gone through the State Council - is a clear signal that Beijing has decided that the balance of risks now lies with growth, rather than inflation. It’s taken them a long while to come around to this view and all the kudos to them for holding the line until now.”
“But now the pivot. They’ll try to spin it as ‘micro-loosening’ and the official monetary policy for next year will still be the same, ‘prudent,’ but this is a big move. It signals China is now in loosening mode. The bank lending quota will be loosened, and given the liquidity crunch we see coming up before Chinese New Year, we’re looking for another reserve requirement ratio cut in January, four times total in 2012.” The Chinese Lunar New Year holiday falls on Jan. 23 in 2012.
“We do not look for rate cuts in 2012, but as liquidity is injected into the inter-bank system and excess reserves rise, de facto lending rates will fall.”
“Unfortunately, this move also probably signals that the official China manufacturing PMI out tomorrow is going to be bad, sub-50 and they want to front-run that.”