PBOC cuts reserve ratio for rural banks but analysts sound caution

The People's Bank of China said it would lower the reserve requirement ratio at county-level rural banks by 200 basis points from Friday, but some analysts cautioned that adding liquidity too fast could cause a rise in financial risks.

The targeted fund easing was a small step to bolster rural development after the State Council announced the decision last week.

Analysts were split. Some believe it signals further easing to come as economic growth cools, but others say the move reduced the chance for a broad-based reserve ratio cut for nationwide banks in the near term.

The central bank said yesterday it would also cut the ratio for county-level rural credit co-operatives by 50 basis points, but added the prudent monetary policy stance would not change and that the adjustment "wouldn't affect the overall liquidity in the banking system".

Bank of America Merrill Lynch's Lu Ting said the macro impact of the cut would be small.

As of end-2013, deposits of rural commercial banks and rural co-operative banks were at 7.8 trillion yuan (HK$9.7 trillion), a tiny fraction of total deposits held by the banking sector at 104 trillion yuan, Lu said. Even assuming the cut is applied to all the 7.8 trillion yuan rural deposits, a 100 basis-points cut would release only 78 billion yuan, he said.