Liquidity Unleashed by Targeted Reserve Cuts Will Fall Short of Forecasts: PBOC


The official news publication of the Chinese central bank says the volume of liquidity generated by targeted reserve ratio reductions launched on 25th January is likely to fall below outside forecasts.

At the end of September the People’s Bank of China released plans for targeted reductions in the reserve requirements for Chinese banks, that would be contingent upon their levels of financially inclusive lending.

Commercial banks whose financial inclusion lending percentage is at least 1.5% will enjoy a reserve requirement reduction of 0.5 percentage points, while those whose financial inclusion lending percentage is at least 10% will enjoy a reserve requirement ratio reduction of 1.5 percentage points.

While observers expected that the targeted reductions would unleash considerable liquidity, with China International Capital Corporation expecting an increase of up to 1 trillion yuan, PBOC itself has made haste to play down the potential increase in funds.

An article published by PBOC’s official news publication entitled “Targeted Reductions Will Drive the accelerate Growth of Financial Inclusion Business in the Banking Sector” (定向降准推动银行业加快发展普惠金融业务) cites multiple experts who point to far more modest liquidity gains as a result of the reserve ratio cuts.

“Our calculations indicate that the actual amount of liquidity released will be far lower than most forecasts,” Cai Hao (蔡浩), guest research at the Public Policy Research Institute of the South China University of Technology in Guangzhou.

“We forecasts that the liquidity unleashed by this targeted reserve reduction will probably be between 300 billion to 380 billion yuan.

“This amount is even lower than the liquidity released by a standard medium-term lending facility.

“Based on the delay of the new targeted reserve reduction policy by one quarter, it’s not hard to see that PBOC is maintaining an extremely cautious attitude towards the release of long-term liquidity under the current macro-policy framework.”

PBOC governor Zhou Xiaochuan flagged prudent and neutral monetary policy and modest credit growth in his 2018 new year’s address, amidst China’s ongoing deleveraging drive.

“This targeted reserve reduction will have a short-term impact on liquidity and the money markets,” said Zeng Gang (曾刚), chair of the National Institution for Finance and Development, one of China’s leading think tanks.

Zeng sees PBOC keeping market rates at steady levels in 2018 by “trimming the peaks and filling the troughs” of liquidity.

“The central bank’s deleveraging and effective control of macro-leverage levels…will remain unchanged in 2018.

“For this reason, despite the target reserve reductions triggering short-term increases in market liquidity, loosening will not continue persist for a long period.

Dong Ximiao, a senior researcher from the Chongyang Institue for Financial Studies at Renmin University (董希淼), said that the targeted reserve cuts should be viewed as a structural liquidity adjustment with the goal of supporting and driving greater release of credit in financial inclusion areas.

“The central bank’s targeted reserve cut  is a form of precision irrigation,” said Dong. For the banks, they can definitely compete for more beneficial policies by raising certain loan ratios, but this is also a form of structural optimisation.

“Because the channelling of credit to financial inclusion areas will increase, other areas are likely to see corresponding declines in their share of lending.”

The article further notes that because the targeted reserve reductions do not include online platform that already have an established presence in the financial inclusion sphere, some observers have expressed concern that this could be a squeeze on their operations.

According to Li Honghan (李虹含) from Wuhan’s Zhongnan University of Economics and Law, the cuts could instead spur grater cooperation between the banking sector and existing fintech enterprises when it comes to financial inclusion.

“At present online financial institutions possess outstanding advantages in areas such as channels, users and networks,” said Li.

“Because of issues such as the risk preferences of banks themselves and inadequate collateral on the part of micro-enterprises, the problem of difficult and expensive financing for China’s small and medium-sized enterprises has yet to be adequately resolved.

“However, online financial enterprises can use their collection, analysis and processing of big data in this area to supplement the inadequacies of traditional banks when it comes to risk controls, as they have advantages compared to traditional financial institutions when it comes to the assessment and lending rate for micro-enterprises.”