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China to boost bank lending power, though IMF says no need

By Koh Gui Qing

BEIJING (Reuters) - China aims to cut the proportion of cash that commercial banks must keep with the People's Bank of China, the banking regulator said on Friday, signalling further monetary loosening although the IMF and World Bank say the economy is doing fine.

The China Banking Regulator Commission (CBRC) did not say when reductions in banks' reserve requirement ratios would be made, but it is the third time in as many months that Beijing has signalled a cut in RRRs, which would free up more cash for lending needed to shore up growth.

The CBRC did, however, qualify its comments, saying RRR reductions would be available to those banks whose lending to small firms and the farm sector warranted the reward. It did not elaborate.

The central bank also signalled on Friday that it would keep credit supply ample by letting China's main money market rate fall again this week.

Aside from prospects for reductions in banks' RRR, two bankers told Reuters on Friday that the central bank has also lent $16 billion to commercial banks so that they can issue the money to farming projects.

Both the IMF and World Bank gave China a thumbs-up in separate reports this week that said the world's second-biggest economy should hit the government's target of around 7.5 percent growth this year, and encouraged the more urgent pursuit of reforms.

Some economists say the IMF and the World Bank may have been unduly confident about China's near-term growth prospects.

"If the government wants to achieve its 7.5 percent growth target, I don't really agree with the IMF that it can just not do anything," said Julian Evans-Pritchard at Capital Economics in Singapore. "I think the downward pressure on the economy, especially from the property sector, is still quite significant."

Buffeted by unsteady global demand and slowing domestic investment, growth in China's stuttering economy cooled to an 18-month low of 7.4 percent between January and March.

A cool-down in a buoyant property market, which contributes more than 15 percent of China's economic expansion, has fuelled fears that the Chinese economy will face even stronger headwinds in coming months. That has fed investor speculation that China will take firmer action to boost activity, including lowering the RRR for all banks.

The economy faces relatively big downward pressures even as the growth rate, employment and inflation stayed within reasonable ranges, state radio quoted Premier Li Keqiang as saying.

VIGILANT ABOUT SHADOW BANKS

Banks's RRRs are neither uniform or transparent in China, and members of the ruling Communist Party's politburo have the final say on monetary policy, rather than the central bank or banking regulator.

In April, a week after an announcement by Li, the PBOC reduced the RRR by between 50 and 200 basis points for some banks.

It did not name the banks or detail what their RRRs were after the cut, but the central bank said only some rural banks benefited. Smaller banks tend to have lower RRRs than major banks.

The authorities flagged another cut a week ago, but it is unclear whether that has taken place, though the latest comments from the banking regulator have hardened expectations.

The last time China reduced the RRR for all banks was in May 2012, when a cut of 50 basis points lowered the ratio to a maximum 20 percent for the country's biggest banks.

Authorities have chosen a more nuanced approach this year, opting to selectively relax policy in areas that it believes require assistance, rather than let money seep into speculative or wasteful activities.

The CBRC also said on Friday that it will tighten supervision of the shadow banking sector to crack down on risky lending that occurs outside bank balance sheets.

The World Bank urged China to speed up fiscal and financial sector reforms to deal with the root cause of its debt problems.

President Xi Jinping said on Friday careful planning of fiscal reforms was needed, the official Xinhua news agency said.

(Additional reporting by Shen Yan; Editing by Simon Cameron-Moore and Nick Macfie)

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