China’s Stock Rally May Delay RRR Cut Says Deutsche Bank, BofA

China’s surging stock market may persuade the central bank to delay a cut to banks’ required reserve ratios, according to economists from Deutsche Bank AG and Bank of America Corp.

The rising risk of a stock bubble makes it less likely China will this month lower the level of reserves banks must hold against deposits, Zhang Zhiwei, chief China economist at Deutsche Bank in Hong Kong, wrote in a note. China may defer a system-wide RRR cut from mid-December because the central bank treats high-profile easing as a market-stimulating tool only when markets slide, said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong.

China’s stock market regulator and the official Xinhua news agency are calling for calm as retail investors rush to buy stocks. The People’s Bank of China, which last month lowered lending and deposit rates for the first time in two years, has refrained from an across-the-board reduction to banks’ reserve ratio requirements since May 2012.

“Cutting RRR and/or interest rates amid a sharp stock market rally may add fuel to the fire and jeopardize financial stability,” Zhang from Deutsche Bank wrote. “The rally may exacerbate the tight liquidity conditions in the real economy as money is lured to the equity market.”

China’s benchmark Shanghai Stock Exchange Composite Index gained as much as 2.1 percent, surpassing 3,000 for the first time since 2011, while the China’s CSI 300 Index advanced a 12th day, set for the longest streak ever. The Shanghai Composite has risen more than 20 percent since the Nov. 21 interest rate cut.

Stock prices are rising even as economic data has shown further weakness. Exports in November rose 4.7 percent from a year earlier, missing the 8 percent median estimate in a Bloomberg News survey, while imports fell 6.7 percent, compared with projections for a 3.8 percent increase, on falling oil prices and sluggish domestic demand.

Rate Swaps

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose four basis points to 3.29 percent, according to data compiled by Bloomberg. It climbed 41 basis points last week, the steepest increase since June 2013. The yield on government bonds due October 2015 climbed 11 basis points to 3.30 percent.

Until last month, China’s leaders had held off broad stimulus, preferring targeted liquidity injections and expedited spending to boost the economy.

The stock market rally since then may validate “fears behind their earlier preference for targeted measures,” Tim Condon, Singapore-based head of Asia research at ING Groep NV, wrote in a note today. “We also think the stock market reaction reduces the likelihood of additional policy interest rate cuts.”

— With assistance by Xin Zhou

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