BEIJING (BLOOMBERG) - China could cut banks' reserve-requirement ratios as early as this weekend to spur economic growth and boost cash supply to counter a surge in municipal bond sales.
The People's Bank of China (PBOC) may lower the amount lenders must set aside as reserves by as much as 100 basis points this weekend to 17.5 per cent, according to China Merchants Bank Co. analyst Liu Dongliang. That would be the third reduction this year. HSBC Holdings Plc predicts a 50 basis-point cut in the "coming weeks", while Goldman Sachs Group Inc. said one may occur this month at the earliest.
Exports fell for a third month in May and inflation slowed to the least since January, data showed this week, indicating there's room for more monetary easing to spur an economy that grew the least in six years last quarter. A fourfold surge in municipal bond sales this year, as the government encourages local authorities to switch high-interest debt into lower-cost notes, is pushing up borrowing costs.
"There are no signs of the economy stabilizing yet," said China Merchant's Mr Liu in an interview on Wednesday. "As muni bond issuance becomes a regular occurrence, the central bank will probably think of ways to guide longer rates downward and lower funding costs."
The central bank may seek to cut reserve ratios as twenty- four initial public offerings may lock up an estimated 6.7 trillion yuan (S$1.47 trillion) of funds next week. As of Thursday, local governments had announced 161.2 billion yuan of muni sales for next week, while some 670 billion yuan from the PBOC's Medium-Term Lending Facility comes due. Firms will also be withdrawing cash to make tax payments.
The seven-day repurchase rate climbed for a fourth day on Friday, rising two basis points to a one-week high of 2.07 per cent, according to a weighted average from the National Interbank Funding Center.
"Funding conditions may be tighter next week," China Merchants' Mr Liu said.
The benchmark 10-year sovereign bond yield of 3.62 per cent is little changed from the start of the year even as the central bank cut the lending rate and RRR twice each. Bond investors are preparing for an increase in supply as the Ministry of Finance granted another 1 trillion yuan quota for a local-government debt swap this week, boosting the program to 2 trillion yuan. The tenors of these new munis have ranged from three years to a decade so far.
A reduction in the reserve-requirement ratio could occur as soon as this month, the most effective way of pushing down long- term rates, Goldman Sachs Group Inc. economists led by Yu Song wrote in a research note.