The People's Bank of China (PBOC) announced Wednesday that
reserve requirements would be selectively
cut by 200 basis points
(2%) for hundreds of branches of the Agricultural Bank of China, in
order to boost rural credit.
[caption id="attachment_52787" align="alignright" width="220"
caption="The People's Bank Of China headquarters in Beijing"]
The move follows 50 basis point cuts for all banks in February
and November. This was
the market had been eagerly awaiting ever since the
government cut 2012 GDP growth expectations in the beginning of
March to 7.5%.
Despite the lowered growth estimate, actual growth generally
comes in above target and is the reason many economists are still
expecting growth of 8% or higher.
The November cut to reserve requirements was the first since
2008 and followed five interest rate increases, and nine increases
to the reserve requirement in 2011. Even with the cut in February,
the reserve requirement stands at 20.5%.
Lower property prices - a side-effect of restrictive monetary
policy last year - means the central bank will need to continue
cutting interest rates and reserve requirements
aggressively to accomplish growth targets. While the selective
cut for the Agricultural Bank is welcome, there will be more to
come and investors should position accordingly.
Consumer and producer price indexes are both released on the 9
each month, while industrial production and retail sales are
usually reported around the second week. These economic reports are
extremely important for policy decisions and the central bank may
wait until the third or fourth week of the month to decide monetary
shifts. Investors should keep an eye on inflationary pressures and
economic reports but understand that an announcement from the PBOC
can happen at any time.
Resources and commodity plays will be the most direct
beneficiaries of further stimulus. Precious metals may also get a
boost from inflationary expectations.
Yanzhou Coal Mining (YZC,
) has come under pressure since the beginning of March but would
benefit from increased expectations for growth. Stocks of other
emerging market companies like Vale (VALE,
) would also benefit from further stimulus in China. The Brazilian
government and central bank have been aggressively fighting a
strengthening currency lately to prop up exports which should
support companies like Vale and Gerdau (GGB,
) over the next few quarters.