(Yicai Global) March 10 -- The more than CNY1 trillion (USD158.3 billion) in profit that China’s central bank will hand to the central government this year, mainly to boost financing to local governments, will not substitute for further cuts in the reserve requirement ratio for banks, according to economists and analysts.

The transfer has been greeted by some as the equivalent of a 50 basis point cut in the RRR, heading off the near-term need to further reduce the amount of funds banks must hold onto, rather than lend out or invest. But many economists and analysts disagree.

“We can’t say that the handover of CNY1 trillion has the same effect as reducing the reserve requirement ratio, just because it comes from the central bank,” said Lian Ping, chief economist at Zhixin Investment Research Institute.

Use of the central bank’s profits for fiscal spending makes fiscal policy more proactive and will have an expansionary effect on the economy, Lian said, noting that it will be the expansionary effect of a proactive fiscal policy, not that of a loose monetary policy.

The People’s Bank of China made the announcement to transfer the CNY1 trillion profit to the central government on March 8. It was the first time for the bank to make the annual transfer public.

While the PBOC’s profit goes on fiscal expenditure in the real economy, RRR cuts require commercial banks to create credit, said Wen Bin, chief researcher at China Minsheng Bank. The two are completely unrelated, according to Wang Wing, chief macroeconomic analyst at Golden Credit Rating.

The easing effect of the profit transfer will be limited in the short term, Wang said, adding that RRR cuts will directly boost the long-term liquidity of banks and improve their lending capacity, which is something the central bank’s profits cannot achieve, as they increase the financial capacity to lower taxes and fees.

The profit transfer will not lessen the possibility of RRR cuts, Zhixin Investment’s Lian said. The PBOC’s profits will go to expand financial capital investment, which will require more liquidity, so that a proactive fiscal policy will not be discounted, and the requirements of monetary policy support and fiscal policy can be realized, he said.

Even if RRR cuts do not happen in the short term, it could be due to their limited effect in solving current problems and not because the PBOC’s profit has replaced them, said Zhang Yu, chief macroeconomic analyst at Huachuang Securities.

Whether China will cut the RRR or not mainly depends on the economy’s performance, which can be judged by investment and consumption data in the first two months of the year and February’s financial data, according to Wang.

Editor: Futura Costaglione