PBOC Cut RRR; More Easing is Expected to Boost Recovery

Dec 06 21, 12:21 GMT

The PBOC announced to cut the reserve requirement ratio (RRR) by -50 bps, effective December 15. Yet, the reduction will not apply to financial institutions with existing RRR of 5%. Releasing about RMB 2 trillion in long-term liquidity, the amount is not significant but sent a signal that more stimulus would follow to boost the economic recovery. Moreover, the policy divergence could lead to renminbi’s weakness against US dollar.

Hinted by Premier Li Keqiang last Friday, China’s central bank formally announced to lower the RRR by -50 bps. Since some of the funds released will be used to repay matured medium-term lending facility loans, the liquidity injection to the market would be about RMB 2 trillion, resembles an average month’s new renminbi loan.

The reduction would leave the weighted average RRR for financial institutions at 8.4%. Lower interest rates after the move might be positive news for the real estate sector. However, banks would likely be very cautious when lending to the debt-ridden sector. The default of Evergrande and some other developers indicate that more debt to support the sectors could lead to a vicious spiral which would result in the collapse of the entire sector, and China’s economy. Banks might choose to fund state-backed infrastructure or mortgage, instead.

It was noted in the policy statement that the cut is a “regular monetary policy action” and that the PBOC would “continue with a normal monetary policy, maintaining the stability, consistency and sustainability of policy, and won’t flood the economy with stimulus”. We expect more easing on the way. Since the RRR reduction this time does not target small and medium-sized enterprises, it is expected that the government or the central bank would announce stimulus measures directed to SMEs.

While the central bank attempted to downplay the possibility of a renewed monetary easing cycle, further RRR cut and even rate cut are getting more likely. This is in contrast with the Fed’s stance of QE tapering, followed by rate hike. The policy divergence could lead to weakness in renminbi against the greenback.

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