Friday, February 3, 2012

China's 2012 monetary policy: gradual easing

Traditionally after a regime change, Chinese authorities don't want to implement anything drastic. China's new leadership will therefore be moving slowly on monetary easing. JPMorgan expects a gradual reduction in the reserve requirement ratios (RRR) and a stabilization later this year.

RRR forecast by JPMorgan

Note that large banks have been required to maintain higher capital ratios since the 2008 crisis. China does not need to go to Congress, seek comments from the industry, hold numerous Congressional hearings, etc. in order to implement higher capital rules for their "too big to fail" institutions. These are the "advantages" of a dictatorship.
JPMorgan: We expect monetary easing in 2012 to be moderate, and mainly consist of quantitative measures, including RRR cuts, OMOs, and window guidance on bank lending. In particular, we expect four more RRR cuts (totaling 200bp) in 2012, three in 1H. New loan creation should reach 8.2 trillion yuan (or 15% increase), up from 7.47 trillion in 2011. Meanwhile, the policy rate will likely remain on hold unless economic conditions deteriorate dramatically.
The expectation is that the PBoC will continue keeping loan growth limits fairly tight at the beginning of the year to give themselves room, should a more drastic action become necessary later. Tightening in the property markets will also continue. In the mean time the stimulus will be focused on major national infrastructure projects, affordable housing, and small businesses.
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