It's been almost two years since China's central bank used one of its big policy tools to adjust the country's monetary policy. But with the release of Friday's inflation data -- which shows a mild rise in consumer prices, along with declining producer prices -- some are suggesting it's time to open up the tool box once again.
Across China, most major banks have to place 20% of their deposits with the central bank. That requirement both serves as a liquidity cushion and helps cap their lending. A cut in the reserve requirement would make more of those deposits available for lending and perhaps in turn provide a welcome tonic for the economy.
Part of the reason why the central bank doesn't want to adjust monetary policy is that the People's Bank of China doesn't want to signal to the market that it's loosening its monetary stance. For the time being it is holding to its guideline of maintaining a 'prudent' monetary policy, wary of existing credit problems and worried it might set off a new credit binge.
But a number of economists say there's a real need for the central bank to cut the reserve requirement ratio. On Friday, ANZ Bank wrote in a report: 'It is time for the PBOC to cut the reserve requirement ratio,' adding that the risk of deflation is rising and real economic activities remain 'lukewarm.'
Likewise, Nomura economist Zhang Zhiwei said that policy easing is becoming more likely due to declining inflation and rising risks in the property sector, adding the bank expects a 50-basis point cut in the second quarter.
Feng Jianlin, an economist with the Beijing Fost Economic Consulting Co., says that China risks deflation if it doesn't cut the reserve requirement ratio. 'It's already a bit late,' he said. 'I see no reason to wait.' China's producer prices have fallen for 26 straight months.
China's economic growth is slowing -- down to 7.4% in the first quarter year on year after a 7.7% rise in the fourth quarter of last year. Some economists suggest that the government might miss its target of about 7.5% growth for all of this year.
Though low inflation is usually good news, deflation isn't. The fear is that weak demand will depress prices that factories get for key materials, such as steel, coal and cement. That cuts into factory profits and makes it harder for them to repay debt, in turn posing a threat to the nation's financial system.
The consumer price index, a key gauge of inflation, climbed 1.8% year on year in April -- its mildest rise in 18 months -- and down from a 2.4% rise in March. Producer prices, which measure inflation at the factory level, were down 2% from a year ago, and show no sign of turning positive anytime soon.
But the PBOC said price levels as well as economic growth are largely stable.
'Currently, the external and internal conditions are relatively steady. The domestic economy is operating within a reasonable range, the monetary environment is relatively stable and the industrial production momentum is relevantly sufficient,' the PBOC said in its first quarter policy report released earlier this week.
Though China has already announced a cut in the reserve ratio for certain 'qualified' rural banks, the move isn't likely to have a big impact on the banking system.
And in the meantime, not all economists agree that it is a good time to cut the reserve requirement ratio. Likewise, they doubt the central bank has any such plans.
An across-the-board cut in the reserve requirement should only be triggered if economic indicators deteriorate, said CICC economist Peng Wensheng in a note on Thursday. He added the central bank's commitment to stabilizing the total supply of credit and improving the credit structure suggests that policymakers are cautious about loosening their monetary policies.
More likely near-term policy adjustments may focus on the exchange rate as well as maintaining stable liquidity in the interbank market, according to JP Morgan economist Zhu Haibin. If the PBOC does change the reserve requirement--something he doubts will soon occur--it would likely be done to offset reduced inflows of foreign exchange, as opposed to try and ameliorate deflation.
Though economists may disagree about the need for a reserve cut, there's one thing they do agree on: The importance of improved communication with the central bank.
The market is not clear about what the central bank wants to do, said Liu Xiao, a researcher with Beijing Anbound Information, a Chinese think tank, and that can be damaging.
'Poorly-guided expectations like that benefit nobody, especially at a time when economic growth is softening,' Mr. Liu said.
北京福盛德经济咨询有限公司( Beijing Fost Economic Consulting Co.)经济学家冯建林说，如果央行不下调存款准备金率，中国将面临通货紧缩风险。他表示，现在已经有点晚了，他认为没有理由再等了。中国生产者价格指数(PPI)已经连续26个月下滑。
中国智库北京安邦咨询公司(Beijing Anbound Information)的研究员刘肖说，市场并不清楚央行想要做什么，这种情况可能产生负面影响。