BEIJING, June 17 (Xinhua) -- Much hope has been pinned on China's cautiously targeted reduction in banks' reserve requirement ratio (RRR) to gradually lift the economy. But news of the policy expansion emerged on the first day of its implementation raising doubts whether the move will have the desired effects.
To enhance financial support to the real economy, the central bank specified last week that it will cut the RRR by 0.5 percentage points for banks engaged in proportionate lending to agricultural and small firms, along with a string of requirements attached for banks to be eligible for the narrow-based cut.
On Monday, the first day the policy went effective, the market was flooded with reports that several joint-stock banks, including China Minsheng Bank and Industrial Bank, had gained approval to cut the reserve ratio.
The news was interpreted as an expansion of the targeted policy as, according to Barclays, the banks would not have met the central bank criterion unless certain parameters were relaxed.
In an immediate response to the market stir, the central bank clarified on its official Weibo account that the scope for the targeted RRR cut had not been widened, stating that banks that meet the previously stated requirements include state-owned commercial banks and joint stock commercial banks.
Zhong Zhengsheng, a macro economy analyst with Guosen Securities, said the phenomenon showed the central bank has certain discretion over the implementation of the rules.
"There is a possibility that more joint stock commercial banks will join the RRR cuts," he noted.
Barclays holds the same view, believing the central bank will expand the targeted RRR cuts to include more banks in view of a still-fragile economy and downside risks to growth.
Analysts estimated the latest round of RRR cuts would inject nearly 100 billion yuan in liquidity.
While acknowledging the benefits of the targeted easing, Lu Ting, chief China economist with Bank of America Merrill Lynch, pointed out several problems associated with the policy, as loans to agriculture and SMEs are not well defined, and information disclosure is poorly handled by the central bank.
"Without public disclosure, insider information of RRR cuts for individual banks could easily be taken advantage of," he wrote in a research note, adding the drawbacks of targeted RRR cuts will soon attract more attention and unlikely to become a new norm for future policy.
China's economy grew at its weakest pace in 18 months in the first quarter, expanding by 7.4 percent, lower than the 7.5 percent target, but there are signs that the economy may be gaining strength.
Growth in the manufacturing sector continued to accelerate in May, hitting a five-month high that pointed to a stabilizing economy.
But despite the gaining momentum, Barclays expects more monetary easing in the form of (targeted) interest rate cuts and possibly system-wide RRR cuts in the second half of the year.
The bank raised China's GDP growth forecast to 7.4 percent in the second quarter.