Scope of targeted RRR cut stirs market

Barclays holds the same view, believing the central bank will expand the targeted RRR cuts to include more banks in view of a still-fragile economy and downside risks to growth.

Analysts estimated the latest round of RRR cuts would inject nearly 100 billion yuan in liquidity.

More lenders make RRR cuts

Reserve ratio cuts to tackle slowdown

While acknowledging the benefits of the targeted easing, Lu Ting, chief China economist with Bank of America Merrill Lynch, pointed out several problems associated with the policy, as loans to agriculture and SMEs are not well defined, and information disclosure is poorly handled by the central bank.

"Without public disclosure, insider information of RRR cuts for individual banks could easily be taken advantage of," he wrote in a research note, adding the drawbacks of targeted RRR cuts will soon attract more attention and unlikely to become a new norm for future policy.

China's economy grew at its weakest pace in 18 months in the first quarter, expanding by 7.4 percent, lower than the 7.5 percent target, but there are signs that the economy may be gaining strength.

Growth in the manufacturing sector continued to accelerate in May, hitting a five-month high that pointed to a stabilizing economy.

But despite the gaining momentum, Barclays expects more monetary easing in the form of (targeted) interest rate cuts and possibly system-wide RRR cuts in the second half of the year.

The bank raised China's GDP growth forecast to 7.4 percent in the second quarter.

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