PBOC Expected to Implement Another Targeted Reserve Ratio Cut Around October

Domestic analysts expect the Chinese central  bank to implement another targeted cut to the required reserve ratio following its latest surprise liquidation injection on 17 September.

On Monday the People’s Bank of China used one-year medium-term lending facilities (MLF) to inject 265 billion yuan into financial markets, in a bid to shore up cross-seasonal liquidity.

China CITIC’s fixed income team said to state-owned media that the move was intended to offset any liquidity pressure created by the heavy issuance of special bonds by local governments in September, as well as a rise in cash demand from the public as the Mid-Autumn Festival and China’s National Day both approach.

The believe that the country’s economic fundamentals and monetary policy are facing both internal and external pressure, making it increasingly important for Beijing to maintain steady rates and stable financial environment.

For this reason CITIC analysts forecast another targeted cut to the required reserve ratio for Chinese banks around October, given multiple factors including easing growth in deposits, a continued shortfall in medium and long-term liquidity, further heavy issuance of local government bonds in October, the maturation of a sizeable volume of MLF in the fourth quarter, as well as the high likelihood of another rate hike from the US Fed at the end of September.

PBOC implemented three targeted cuts to the required reserve ratio in the first half of 2018, as part of efforts to shore up liquidity and financial inclusion.

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