Analysts expect China to cut bank reserve ratios soon

China's central bank is expected to cut banks' cash reserve requirements again soon to bolster financial system liquidity as it looks to support the slowing economy, analysts said, as market speculation over another policy move grows.

Liquidity conditions in China's banking system usually tighten in April as companies make first-quarter tax payments, boosting demand for cash and sucking funds out of the market.

But China watchers say Beijing will be keen to reduce the risk of any financing crunches, especially amid early signs that a spate of economic support measures in recent months are starting to take hold.

A marked tightening in liquidity could run the risk of pushing up interbank money rates, which the PBOC has been guiding lower to reduce strains on corporate balance sheets. Expectations of more stimulus have also been a major driver behind a sharp rally in China's stock markets this year that is attracting more local and foreign investors.

Market participants expect tax payments, the issuance of local government bonds and the maturing of medium-term lending facility (MLF) loans to drain more than 1 trillion yuan ($148.77 billion) in liquidity this month.

That has prompted growing market chatter over when the PBOC will reduce banks' reserve requirement ratios (RRR) next to make up the funding gap, after five cuts over the past year.

On Friday, chat groups on China's popular social media platform WeChat shared what appeared to be a paragraph pasted from a story by the official Xinhua news agency saying that the People's Bank of China had announced a cut in the reserve requirement ratio (RRR), to take effect on April 1.

In a post to its official account on China's Twitter-like Weibo service, the PBOC denied the reports. On Tuesday morning, the PBOC went further, saying it had asked police to investigate.

For a market accustomed to seeing the central bank ignore such rumors, its quick response came as a surprise. But many market watchers nevertheless say market conditions continue to point to an imminent cut.

Iris Pang, Greater China economist at ING, said the PBOC's reaction showed it is becoming more sensitive to market speculation and movements.

“The timing of the RRR cut is important to interbank interest rate movements, it is therefore (necessary that) the central bank clarify quickly,” Pang said, maintaining her call for an RRR cut in the first two weeks of this month.

Raymond Yeung, chief economist for Greater China at ANZ, is also keeping his forecast unchanged.

“We believe that the PBOC will cut the RRR again in mid-April. Based on our research on liquidity conditions, an RRR cut is still needed. We will not change our expectations for the RRR cut just because of this announcement,” Yeung said.

The state-run Economic Information Daily on Tuesday reported Sheng Songcheng, a former PBOC official, as saying that he sees room to lower the reserve ratio further, and that such a move is possible, but it would require an assessment of current economic conditions and overall financial market liquidity.

“(The central bank) will first gauge economic data from the first quarter to decide whether to cut the RRR. If indicators suggest the economy has already stabilized or is about to stabilize, the necessity of lowering the RRR is not huge,” Sheng was quoted as saying.

Activity in China's vast manufacturing sector unexpectedly returned to growth in March, both official and private business surveys showed this week.

But analysts cautioned it is too early to tell if the economy is stabilizing, and further support is likely to be needed to produce a sustainable turnaround.

March data will be released around mid-April with first-quarter GDP on April 17.