Bond Defaults Could Prompt Further Cuts to China’s Reserve Ratio Before Year’s End

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Chinese analysts say the People’s Bank of China could undertake further cuts to the required reserve ratio before the end of 2018 should corporate bond defaults continue.

“There will be another cut to the required reserve ratio this year, while medium-term lending facility (MLF) operations will also continue,” said Lu Zhengwei (鲁政委), chief economist at Industrial Bank Co. to Securities Daily.

According to Lu market trepidations have increased since the spate of bond defaults that kicked off towards the end of April, prompting the Chinese central bank to use open market operations to create steady liquidity conditions.

Should bond defaults trigger systemic risk ahead of expectations, Lu says the central bank is likely to use a required reserve cut to ensure market stability.

Lu also expects PBOC to continue to use targeted reserve cuts to swap out some of its medium-term lending facilities (MLF), reducing the dependence of financial institutions upon wholesale financing.

Official data released by PBOC on 1 June indicates that the outstanding MLF balance stands at 4.017 trillion yuan.

According to Lu MLF are still a necessity for PBOC, and the instruments will continue to be used in future alongside reserve ratio cuts.

“There is no entirely exclusive relationship between the two.”

A total of 920 billion yuan in central bank repos and 259.5 billion yuan in MLF are scheduled to mature this month, while data from Wind indicates that 500 billion yuan in repos are scheduled to mature during the period from 2 to 8 June alone.

Wang Qing (王青) from Golden Credit Rating International said PBOC would iron out liquidity fluctuations using open market operations in June, in order to maintain rational stability in the overall volume and structure of financial market liquidity.

Given the recent required reserve ratio cut in April, and the need to wait until policy impacts are observed, Wang does not see much likelihood of further reductions in the required reserve ratio in the near-term.

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