UBS Sees Chinese Central Bank Cutting Reserve Ratio 100 Basis Points in 2020, Acceleration of Bond Approvals

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UBS expects the People’s Bank of China (PBOC) to adopt a range of measures in the near-term to help the Chinese economy remain afloat during efforts to contain the spread of the novel coronavirus.

PBOC injected 1.7 trillion yuan into the Chinese economy via open market operations at the start of February, in order to help the market weather the immediate impacts of the coronavirus.

UBS analyst Wang Tao (汪涛) said to state-owned media that he expects further robust measures from Beijing to help the economy remain afloat.

“The first thing will definitely be to provide liquidity,” said Wang.

“Last week the central bank already provided an extremely large amount of liquidity, mainly to ensure the smooth operation of markets and the economy.

“In future we feel that they will continue to expand liquidity, enabling credit market and bond rates to remain at low levels.

“At the same time [regulators] will approve enterprise bond issuance as quickly as possible, and while ensuring that a greater volume of bonds are issued, interest rates will also simultaneously decline.

“We expect a reduction to the reserve ratio of at least 100 basis points this year, with the first cut to potentially arrive in the next two months.

“Additionally, we believe that the scale of interest rate reductions will be greater than those previously, and feel that there will potentially be a one time reduction to rates for medium-term lending facilities (MLF) in February, of potentially 10 basis point, followed by another 10 point reduction.

“Reductions in the loan prime rate (LPR) could be even greater.”

The last cut to the RRR came on 6 Jan­u­ary, with PBOC im­ple­ment­ing a re­duc­tion of 50 ba­sis points. 

The move marked the eighth cut to the RRR since early 2018, amidst ef­forts to prop up flag­ging growth in the Chi­nese econ­omy. 

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