August 22, 2012

China Could Cut Rates After Cash Boosts

Additional stimulus could mean reserve requirement change as well

Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), said that despite the fact that the country has already added more cash to its economy, additional measures, including a cut in interest rates and/or a change in banks’ reserve requirement ratio (RRR), could also be deployed.

Bloomberg reported Wednesday that the official commented on possible additional steps to boost China’s economy after being asked whether the bank’s recent use of frequent reverse-repurchase transactions means that it will shy away from using reserve ratio and interest rate measures.

In the report, Zhou was quoted saying, “Use of either tool can’t be ruled out.” His comments mean that the possibility still exists, despite the injection on Tuesday of 220 billion yuan ($34.6 billion) into the country’s banking system through reverse repurchase agreements. The move had given rise to speculation that any change to the RRR would likely not be made.

In June and July, China dropped interest rates, the first such move it has made since 2008, and in November it began to cut RRR. To date it has done so three times.

Although Premier Wen Jiabao said last week that slowing inflation provided more leeway to make adjustments to the country’s monetary policy, and that indications of positive economic change are being seen, July data showed instead a continued slowdown in growth. Wen was reported saying that there was “growing room for monetary policy operation.”

Despite Wen’s move three months ago to boost growth rather than rein in a raging economy, cuts in RRR have been slower than expected, displaying a reluctance to allow further growth in inflation. The RRR for the country’s biggest banks has remained at 20% since the middle of May, and Beijing has also indicated that it will keep restrictions on property markets to keep increasing home prices under control.

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