Triple reserve requirement ratio cuts loom in China

China should brace itself for three slashes of 50bps each and another interest rate cut of 25bps in 2012.

In a release by Standard Chartered Research, three more cuts in the reserve requirement ratio (RRR) of 50bps each and one more interest rate cut of 25bps in 2012 are estimated. At the latest economic meeting of the State Council, Premier Wen Jiabao called for a speedy execution of certain high-profile investment projects to boost investor confidence.

Here's more from Standard Chartered:

With lower interest rates and more infrastructure spending, we expect a gradual economic recovery in Q3. And a better second half for China. The economy will not coming roaring back – but it will at very least stabilise and should regain a little bit of momentum.

China‟s economy continued to decelerate in Q2, with official GDP growth of 7.6% y/y and 1.8% q/q. Other indicators, such as electricity production, diesel throughput and feedback from clients, suggest that the quarter was probably even weaker than that.

However, measures to protect the downside have already been implemented – notably, lower interest rates and more infrastructure spending – which should result in a mild recovery in Q3. The jobs market still looks healthy, despite some weakening. The days of double-digit growth for China are over, but that is OK. The first half of 2012 has given reasons to be bearish; the second half will be better.

Onshore liquidity pressures should ease. We estimate three more reserve requirement ratio (RRR) cuts and one more interest rate cut in 2012. We also explore the drivers of interbank rates. Further rate reform now requires banks to improve liquidity management.