(Yicai Global) Dec. 7 -- China is less likely to reduce interest rates after the People’s Bank of China decided to cut the reserve requirement ratio for most banks next week, as the central bank prefers structural policies, according to Zhu Haibin, J.P. Morgan’s China chief economist.

The PBOC announced yesterday that it will cut the RRR for major commercial banks by 0.5 percentage point on Dec. 15, releasing CNY1.2 trillion (USD188.5 billion) of liquidity into the interbank system to underpin economic growth. It is the second reduction this year.

The timing was in line with market expectations. “The market expected another RRR cut to come a bit earlier following the central bank’s unexpected downgrade in July,” Zhu told Yicai Global. “This is because a lot of medium-term lending facilities mature in the fourth quarter, especially in November and December.

“The two months will each see almost CNY1 trillion (USD157 billion) of MLFs maturing, so in theory it is possible to replace MLFs with an early RRR cut,” he said.

“At the moment the central bank is more focused on structural changes in the economy,” Zhu said, “so there is also a clear change in its monetary policies, meaning a greater willingness to use structural monetary tools over aggregate policies.”

The PBOC has unveiled several targeted policy support tools over the past months, including a CNY200 billion (USD31.4 billion) re-loan for small and micro firms.

Earlier, at a regular meeting on Nov. 17, the cabinet decided to set up a CNY200 billion special re-loan to support clean and effective use of coal, in addition to the PBOC’s financial support for carbon emissions reduction.

Zhu expects these tools to reach a total of between CNY1 trillion (USD157 billion) to CNY1.5 trillion next year.

“The central bank will not choose to slash rates for now, so a rate cut is not in our forecast,” he said. A cut will be even more unlikely next year because the consumer price index may be a little higher in 2022, reaching about 2 percent, compared with about 1 percent this year, he added.

“Worldwide, tightening by the US Federal Reserve and central banks of emerging markets may create some indirect constraints on China, and next year will see a global rate hike cycle,” Zhu said, adding that relatively speaking RRR cuts are more of a policy choice.

“From the liquidity perspective, whether it is RRR cut or re-lending, what matters most is to what degree social financing growth can be stabilized,” Zhu said.

“We expect social financing growth to be at a relatively neutral level of 10 percent next year, basically in line with the latest October data.”

Editor: Peter Thomas