China’s central bank has approved “provisional reserve fund drawing arrangements” (临时准备金动用安排) on the final trading day of 2017 for the purpose of shoring up liquidity during the 2018 Chinese New Year.
The People’s Bank of China issued a notice on the afternoon of Friday, 29 December allowing nationwide commercial banks disbursing large volumes of cash to make provisional use of no more than two percentage points of their statutory reserves for a term of 30 days, in order to compensate for the liquidity shortfall that arises during the Spring Festival Period.
According to analysts the move will release approximately 2 trillion yuan of liquidity during the period, and demonstrates the central bank’s commitment to maintaining stable liquidity in the banking system.
This is not the first time that PBOC has permitted provisional allowances for reserve requirements in order to shore up liquidity.
During the 2017 Chinese New Year Period, the Chinese central bank provided temporary liquidity facilities (TLF) (临时流动性便利) to China’s big banks in order to stabilise funds across the vacation.
The current drawing arrangements are more comprehensive, however, encompassing all national state-owned banks and joint-stock banks whose cash disbursement ratios are comparatively high.
“The expansion of the operating target scope better matches the current liquidity needs of the market,” said Ming Ming (明明), chief fixed-income analyst at CITIC Securities, to Yicai.
“It’s of benefit to adjusting transmission mechanisms following the divided tiers of liquidity created by this year’s deleveraging, and is an upgraded version of the TLF.”
Ming Ming ponts out that demand for cash tends to be high concentrated around the Chinese New Year month. M0 data indicates that public holdings of cash saw on month increases of 1.8 trillion yuan, 990 billion yuan, 930 billion yuan and 1.8 billion yuan during the the Chinese New Year periods of 2014, 2015, 2016 and 2017 respectively.
According to Ming the roughly 2 trillion yuan in liquidity released by the new provisional reserve drawing arrangements should be sufficient to compensate for this spike in demand.
The new arrangement also provides bank with a preferential interest rate given that the provisional reserve funds are a purely quantitative tool. Chinese commercial banks are not required to pay for additional financing costs, and only need to undertake the statutory reserve rate of 1.62%.
In this regard the new arrangement differs markedly from the TLF provided earlier this year, the costs for which were largely consistent with the rates for open market operations across the same period.
The new provisional reserve arrangements are available for a longer timeframe than the TLF provided for the 2017 Chinese New Year, which could be utilised across a period of 28 days. The arrangement came into effect on the day that the notice was released, and may be utilised until after the Chinese New Year.
The arrangement is also distinct from PBOC’s open market operations in that does not require the provision of collateral, and is more akin to a loan.
Chinese analysts point out that this latest move from PBOC does not signal a change in its stance on monetary policy or deleveraging moving ahead.
“The provisional reserve drawing arrangement should not be interpreted as a shift towards accommodating monetary policy,” said Wen Bin, chief analyst at China Minsheng Bank’s research institute, to Yicai.
“It differs from the TLC, using statutory reserve funds instead of borrowing from the central bank to provide liquidity support, which is of benefit to reducing the funding costs for qualified banks, and increasing their willingness to deliver funds to the market.
“This will have a positive role with respect to maintaining stable liquidity, and preventing an excessively rapid rise in market interest rates.”