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China May Refrain From Reserve-Ratio Cuts in Rest of 2012

China May Refrain From Reserve-Ratio Cuts in Rest of 2012
The PBOC is using so-called reverse-repurchase agreements to temporarily pump money in and out of the banking system instead of the longer-term measure of changing the reserve ratio. Photographer: Nelson Ching/Bloomberg

Nov. 20 (Bloomberg) -- China may refrain from cutting lenders’ reserve requirements for the rest of the year after an economic slowdown subsided and the central bank increased its use of a separate tool to adjust funds in the financial system.

The People’s Bank of China will probably keep the reserve-requirement ratio for large lenders at 20 percent, based on the median estimate of economists in a Bloomberg News survey conducted Nov. 14-19. That compares with the half-point cut projected last month and the full point forecast in September.

The shift in projections reflects a second month of pickups in industrial production and retail sales and the government’s reluctance to boost stimulus more aggressively as a new leadership headed by Xi Jinping takes office. The PBOC is using so-called reverse-repurchase agreements to temporarily pump money in and out of the banking system instead of the longer-term measure of changing the reserve ratio.

“There won’t be any more moves” in the reserve requirement, said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong, who in October projected a half-point cut. “You can provide the liquidity through open-market operations.”

The government may lower the reserve ratio in the first quarter of 2013, while analysts see no interest-rate changes from now through the end of the survey period of the first half of 2014, based on median estimates. The central bank last cut interest rates in June and July and reduced the reserve ratio three times from November 2011 through May.

Economist Forecasts

Twelve of 20 economists surveyed this month forecast no change in the reserve ratio through the end of 2012. That compares with six of 23 in the October survey.

Foreign direct investment in China fell for the 11th time in 12 months, Commerce Ministry data showed today, as economic growth teetered near a 13-year low and a territorial dispute with Japan weighed on trade.

China’s economy expanded 7.4 percent in the July-September period from a year earlier, the seventh straight quarterly deceleration. Other data have shown signs of a pickup in September and October: Industrial output climbed in October at the fastest pace in five months, while retail sales and exports rose more than estimated.

Some companies are reporting earnings gains. Beijing-based Lenovo Group Ltd. said Nov. 8 that second-quarter profit rose 13 percent as it expanded market share to overtake Hewlett-Packard Co. in personal-computer shipments. The yuan has strengthened 0.8 percent against the dollar since the end of September through yesterday. It rose 0.1 percent today to 6.2297 as of 10:57 a.m. in Shanghai.

Hu Yifan, chief economist at Haitong International Securities Group Ltd. in Hong Kong, said China may cut the reserve ratio in March. Before that, the PBOC will keep using reverse repos to provide funds and help meet “traditionally high demand” around the Lunar New Year holiday, she said.

Lending Policy

China can conduct monetary policy easing through “quantitative measures,” including allowing growth in trust loans, said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong.

“It’s quite clear that interest-rate cuts are off the table now, and even for a required-reserve ratio cut, it’s a quite close call,” said Zhang, who previously worked for the Hong Kong Monetary Authority. While Zhang is forecasting one more cut in the ratio this year, “there is a good chance the central bank will not do it,” he said.

China’s monetary policy may enter a period of “relative silence” in the coming months while the new leaders ponder economic-growth targets, Zhang said. If the government reduced its annual gross domestic product expansion goal to 7 percent, from 7.5 percent, that would mean “the end of China’s monetary policy easing may come earlier than expected,” he said.

To contact Bloomberg News staff for this story: Zhou Xin in Beijing at; Cynthia Li in Hong Kong at

To contact the editor responsible for this story: Paul Panckhurst at

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