BEIJING (Reuters) - China’s central bank on Monday reduced the amount of cash that banks must hold as reserves for the fifth time since February 2015, as it seeks to revive a slowing economy.
The People’s Bank of China (PBOC) said on its website that it would cut the reserve requirement ratio by 50 basis points for all banks, taking the ratio to 17 percent for the country’s biggest lenders. The cut is effective March 1.
LOUIS KUIJS, HEAD OF ASIA ECONOMICS, OXFORD ECONOMICS, HONG KONG
“The aim clearly is to support the economy at a time that downward pressures on growth remain strong and uncertainty is elevated. It remains to be seen what the response on the FX market is. But, in line with the G20 discussions this weekend, this move suggests that for China’s policymakers growth remains key.
“The PBOC needs to walk a fine line. Ambitious growth targets amid weak economic growth mean that monetary policy is called upon to help support growth. But the authorities also seem to want to support the RMB in the face of capital outflows and depreciation pressure. That means that the room for interest cuts has decreased. In recent weeks some of the signals given by policymakers suggested that they preferred low profile measures over high profile ones. However, today’s move shows that, while they have so far shied away from cutting benchmark interest rates, they are willing to use a RRR cut, a relatively high-profile instrument, although clearly not as high-profile as a benchmark interest rate cut.”
“This is basically in line with our expectations. We believed the PBOC needed to cut RRR in March to offset headwinds in the economy. We can see that from PMI and other earlier indicators showing growth, momentum weakened when we entered this year. Also, recently, the equity markets have dropped off. So I think at this stage, the PBOC is trying to support growth, and trying to support the equity market a little bit.
“Also if we look more closely at the credit data, we can see capital outflows are pretty strong so there’s definitely a need to cut RRR to offset capital outflows and ensure liquidity is ample in the domestic market...
“In our view, we think the PBOC will cut RRR four times this year as well as two benchmark rate cuts this year.
“This (RRR cut) has very little to do with supply side reform. This is purely monetary policy. They are targeting aggregate demand and trying to lower financial costs because of high debt in the corporate sector. This is quite different to supply side reform. That’s more structural. I don’t think the PBOC can do much on that front.”
IRIS PANG, SENIOR ECONOMIST, G.CHINA, NATIXIS ASIA RESEARCH, HONG KONG:
“We believe that the purpose is to increase the commercial banks’ lending ability. Total RMB deposits amounted to RMB 137.76 trillion at the end of January and a 50 bps cut releases RMB 689 billion.
“The move is unexpected after the announcement that the PBOC would conduct daily open market operations. This reflects the central bank is keen to ease liquidity in the China banking sector. The central bank may then need more window guidance to commercial banks to ensure these additional liquidity would not be directed to save zombie corporates in overcapacity industries.
“The unexpected cut in RRR will certainly increase the depreciation pressure of both CNY and CNH. USD/CNH depreciated to 6.5523 from the CNY fixing rate of 6.5452. High volatilities are expected in both the foreign exchange market and equity market.
“We expect lower interest rates in China would be mostly reflected in open market operations.”
“The 50 bps RRR cut is a bit surprising as the authorities reiterated that RRR cut will add pressure on CNY exchange rate. However, the RRR cut is inevitable due to capital outflows. More importantly, the MLF and reverse repos don’t have the same impact as an RRR cut, as the rates for MLF and reverse repos are at least 60-100 bps higher than the interest rates on official deposit reserves. That said, with the help of RRR cuts, commercial banks will be able to lower the cost of funds more effectively.
“The recent sell-off in stock market is definitely another reason behind today’s policy move. It appears that China is deeply concerned about the financial instability. By cutting RRR to ensure onshore market liquidity aims to restore the market confidence.
“Looking ahead, given the widening fiscal deficit, continued capital outflows and slowing growth, another 100-150bps cut to RRR can be expected this year. Of course, the side effect is on CNY exchange rate. We still see weakening bias in CNY in the foreseeable future; Asian currencies would be under pressure to depreciate as well.
“To be blunt, the timing of this cut is not perfect - USD has regained strength in the past two weeks. If PBOC can act ahead of the curve, i.e. when market was pricing a weak USD in early February, China would have more policy room.”WANG JUN, SENIOR ECONOMIST, CHINA CENTRE FOR INTERNATIONAL ECONOMIC EXCHANGES (CCIEE), BEIJING:
“I think this is required by liquidity management. The central bank may still rely on RRR cuts to replenish its base money due to foreign exchange sales. The central bank had previously relied on short-term policy tools to provide liquidity. The (yuan) exchange rate has been basically stable recently, while the economy still faces relatively big downward pressure. So, the central bank needs to send out loosening policy signals.
“To support ‘supply-side reforms’, the government needs to maintain counter-cyclical policies. The possibility of cutting interest rates exists to help lower borrowing costs.”
LI HUIYONG, ECONOMIST, SHENYIN & WANGUO SECURITIES, SHANGHAI:
“China’s government is pushing forward the ‘supply side’ reform and the move needs someone to pay the costs. A loosening monetary environment is what we need.
“We believe the central government will keep its loosening policy stance this year to support the economy. We expect five further cuts to banks’ reserve requirement ratio (RRR) this year, together with one or two more interest rates.”
“It’s not a total surprise. Growth is still slowing and inflation has a deflationary risk so this points to further easing.
“The G20 also made it clear we need to use all policy available to try to support growth so putting all this together, I think it becomes a consensus that more needs to be done to support growth.
“Supply side reform is still the key focus but you still need to have stable growth in order to provide favorable conditions for supply side reform.
“Stabilized growth is a condition for implementing supply side reform. It’s best achieved from both expansionary fiscal and monetary policy.”
Reporting by China economics team; Editing by Richard Borsuk and Jacqueline Wong