A cut would be triggered if growth slips below 7.5 percent and
towards 7.0 percent, they said, and would come on top of money
market operations and currency intervention via state banks that
traders say has already loosened monetary conditions.
Apart from supporting a stumbling economy, the stronger action of
cutting bank reserves would provide a cushion against any shocks
from financial reforms that the central bank is widely expected to
push through this year, including a widening of the yuan's trading
band to give the currency more room to rise or fall each day and
allowing banks more room to set deposit rates.
"The economy faces big downward pressure," said a senior economist
with the State Information Centre, a top think-tank affiliated to
the National Development and Reform Commission, the country's top
economic planning agency.
"Cutting RRR is likely if economic growth slows further. But they
may still need to wait and see the first-quarter economic data,"
said the economist, who requested anonymity due to the sensitivity
of the matter. The RRR is the reserve requirement ratio, the
official name for bank reserves.
The concern is that the financial reforms could weigh on an already
slowing economy, so the central bank will be prepared to free up
some cash by cutting bank reserves if need be to give the economy
support, the sources at top government think-tanks said.
Private economists have suspected that the central bank might be
willing to cut the RRR, but the sources provided the first
confirmation that the central bank is discussing such an option.
Since May 2012, major banks have had to keep a fifth of their cash
Most of the top think-tank economists believe the central government
would lean on fiscal policy to do its part to support growth,
repeating the mini-stimulus seen last year when Beijing made
targeted infrastructure investments, among other measures.
Trade data last weekend shook markets globally by showing an
unexpected fall in exports in February of 18 percent compared with a
year earlier. Purchasing managers' indexes this year have suggested
growth in factory-sector activity — for years the engine of China's
economy — is stalling.
China's consumer inflation hit a 13-month low of 2 percent in
February, a sign that slowing growth rather than rising prices poses
a bigger risk to the economy.
However, taking these figures as a clear indicator of the economy's
health is difficult because data for the first few months of the
year is distorted by the Lunar New Year holidays.
While financial markets have taken the data at face value to suggest
the economy is struggling, some economists say a clear picture will
not emerge until data for March is published. And that data will not
be released until the middle of April.
Still, other private-sector economists say the actions of the
central bank in letting interest rates fall and the yuan decline has
been in effect a policy easing, perhaps suggesting the central bank
is concerned about the economy's health.
The weighted average of the benchmark seven-day repo stood at 2.26
percent earlier on Tuesday. Average rates have not been so low since
2012. The yuan has fallen sharply since the middle of February and
dropped the most on Monday since April 2008.
Analysts believe the PBOC is conducting a short-term attack on
speculators, who have been pouring money into China to cash in on
what was a steadily rising yuan and high-yields on debt. But the
measures also loosened monetary conditions.
[to top of second column]
"It's like killing two birds with one stone," said Zhao Xijun, an
influential economist at Renmin University in Beijing.
Some of the sources said cutting bank reserves would help to offset
capital outflows if money starts moving offshore either in reaction
to the central bank's attack on speculators or if it later widens
the trading band of the currency. Most expectations point to the
band being doubled in scope to 2 percent either side of a daily
trading reference point set by the central bank.
"A time window for yuan reform to increase two-way fluctuations has
arrived and I believe the central bank will seize the opportunity,"
said a former central bank researcher, who now works for a think
tank and is involved in the policy conversations.
"Slight yuan depreciation is not necessarily a bad thing. We could
see some hot money outflows and, if possible, we could lower RRR a
bit to offset money outflows."
Many analysts believe annual economic growth in the first-quarter of
2014 will slow to 7.5 percent from 7.7 percent in the previous
quarter and 7.8 percent in the third quarter of 2013.
But they said any policy action, including a potential cut in the
RRR, would be modest to ensure financial markets do not think the
central bank is backing away from its reform agenda.
Premier Li Keqiang has hinted at some policy flexibility when he
unveiled this year's economic growth target of 7.5 percent in his
so-called work report delivered to the parliament last week.
The government is aiming to shift the economy's reliance on the
investment and exports that fuelled a double-digit pace of expansion
for three decades to one that leans more on services and
consumption, which it hopes will feed more sustainable long-term
It has said repeatedly an economic slowdown will be a necessary
outcome of reform. But analysts said the bottom line for Beijing
will be to ensure growth is sufficient to produce enough job
creation to prevent social unrest.
The government wants to create 10 million new jobs in 2014 and Li
has said that the economy must grow 7.2 percent annually to do that.
Some 13 million new jobs were created last year when the economy
grew 7.7 percent.
The central bank is keeping a "prudent" monetary policy in 2014 — the catch word used since late 2010 to encapsulate at first modest
policy tightening and then modest loosening following the global
The PBOC raised the RRR 12 times in less than two years by late
2011, among other tightening steps. It then cut the RRR three times
between late 2011 and May 2012. The RRR now stands at 20 percent,
near its record level of 21.5 percent.
The PBOC is a more reform-minded institution compared to some other
agencies of the Chinese government, arguing that reforms will play a
vital role in supporting economic growth over the longer term,
(Reporting by Kevin Yao; editing by Neil
[© 2014 Thomson Reuters. All rights
Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.