China is in a stimulus mode, according to BlackRock.
The asset manager expects China’s central bank – the PBOC – to further ease interest rates and cut the reserve requirement on bank deposits, as well as for the government to channel funds to policy banks to finance infrastructure projects.
BlackRock expects the PBOC to lower the reserve ratio to 12% from 18.5%, which would release around 9.75 trillion yuan ($1.57 trillion) of funds into the financial system, based on an estimate that for every one percentage point cut releases about 1.5 trillion yuan of liquidity.
The funds that will be released through the cuts in reserve ratios will partly offset the impact on liquidity of the capital outflows, according to a BlackRock whitepaper for June sent to NexChange.
“China is in stimulus mode. Fiscal policy is loosening and the PBoC is trying to ease financial conditions without further inflating the credit bubble. The central bank has plenty of room—and appetite—to cut interest rates,” BlackRock said.
The PBOC has cut rates three times since November and has lowered the reserve ratio thrice since late last year to spur the economy that is slated to grow at its weakest pace in more than two decades this year.
BlackRock’s views are shared by Bank of America Merrill Lynch.
In a statement released late Thursday, the bank said the government has sent more easing signals judging from its move to remove the 75% loan-to-deposit ratio.
“(W)e believe monetary policy easing needs to continue, because domestic demand remains weak while financing costs for the real economy are still high. Indeed, the government has sent easing signals to guide loan expansion and lower rates in order to support the real economy,” BofA Merrill Lynch said.
The removal of the LDR will boost bank lending and ease pressure to compete for deposits just to meet the ratio, the bank said.
BofA Merrill Lynch maintained its earlier view that the PBOC will likely reduce the reserve ratio on bank deposits by 150 bps more this year.
Photo credit: Michaël Garrigues via Flickr