China Lowering Deposit Reserve Ratio Will Help Increase Liquidity

SHANGHAI, May 14 (SMM) -- China's central bank announced May 12th it will lower deposit reserve ratio for financial institutions starting May 18th 2012 by 0.5 percentage points, the second decrease this year. Deposit reserve ratio for large financial institutions will be 20.0% after adjustments, with 16.5% at small financial institutions. The Central Bank lowered deposit reserve ratio on February 24th 2012 last time.

The 0.5 percentage points of decrease in deposit reserve ratio is in line with market expectations, and further cut is expected. The action will release about RMB 400 billion of liquidity to markets, mainly supporting real economic growth and favorable for financial markets. Some capital will flow to stocks markets and commodity investment field. China's CPI in April rose 3.4% YoY, with the growth rate slowing. Major economic data including industry value added, consumer goods retail sales value and fixed assets investments all dropped on the YoY basis. Besides, growth of China's imports and exports during April released Thursday was worse-than-expected, causing requirements for supporting policies. HSBC's China PMI also indicated the manufacturing sector is shrinking. China's central bank lowering deposit reserve ratio shows enhancing support for economic growth, so further decreases of deposit reserve ratio is expected, but interest rates will unlikely be cut in the short term.

The deposit reserve ratio cut will cause speculations of policy adjustments to grow, boosting downstream buyers' confidence. Cash flow will ease, pushing up metal investments. Besides, risk appetite will increase in international markets in the short term. As such, the move will boost nonferrous metals prices, but will not change the overall economic situation.