The People’s Bank of China (PBOC) is expected by analysts to further reduce the required reserve ratio for Chinese lenders in a matter of weeks.
A report from Bloomberg points out that Chinese banks are on the hook for 2.93 trillion yuan (approx. USD$457 billion) in medium-term loans made by PBOC that are due for repayment across the remainder of 2018.
Some analysts believe this exorbitant debt level will drive the Chinese central bank to once again cut the required reserve ratio in order to provide lenders with sufficient liquidity for repayments.
PBOC previously implemented a reserve ratio cut on 25 April, with a 100 basis point reduction for a range of Chinese lenders including large-scale commercial banks, joint-stock banks, municipal commercial banks, non-county village commercial banks and foreign-invested banks.
The cut was expected to unleash 1.3 trillion yuan in liquidity, of which 900 billion yuan would be used to repay medium-term lending facilities (MLF) extended by PBOC, and the remaining 400 billion yuan directed towards smaller banks in order to better serve financial inclusion.
While the April reduction has eased the debt burden of Chinese banks vis-a-vis PBOC, over 80% of original MLF funds remain outstanding.
Putting even more pressure on the cash reserves of Chinese banks will be quarterly inspections by regulators, the need to repay 2.3 trillion yuan in short-term interbank debt that according to Bloomberg is due next month, as well as the onset of the tax season in July.
PBOC still has ample room to make RRR cuts, given that they remain unusually high in China at 16% for most banks.
Analysts such as Ding Shuang, chief China economist at Standard Chartered in Hong Kong, believes the RRR cut will arrive in July, driven by tax repayment pressure, while UBS AG economists see a reduction of as much as two percentage points.
Domestic media also points to the strong possibility of a RRR cut in the near term, with a front-page opinion piece in China Securities Journal warning of a hole in liquidity across the next two months.
Financial inclusion remains at the fore of PBOC’s priorities, with analysts pointing out that an RRR cut will provide for a more equitable release of liquidity compared to the MLF that are harder for smaller banks to access.
China’s modest-sized banks are more inclined to provide loans to small and medium-sized enterprises, so granting them greater access to funds should help to advance Beijing’s much-vaunted policy goals of expanding financial inclusion, and ensuring that the finance sector serves the real economy.
The chief dilemma for PBOC should it pursue another RRR cut will be the current weakness of the yuan, which recently tapped a four month low, given that any loosening of monetary policy is likely to lead to further declines or prompt capital outflows.