Chinese Central Bank Could Further Cut Reserve Ratio in Response to Slowing Economy

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China’s central bank could be planning to further reduce the required reserve ratio in response to slowing economic growth induced by Beijing’s ongoing deleveraging campaign.

Policy sources said to Reuters that the release of lacklustre economic data on Thursday could push the People’s Bank of China (PBOC) to further reduce the required reserve ratio, after implementing a cut just two months prior.

PBOC broke from precedent by refraining from following the US Federal Reserve’s latest rate hike, which indicates that liquidity levels remain a concern for the Chinese central bank.

“Monetary policy could be slightly loosened under the ‘prudent and neutral’ stance, and such loosening should be targeted rather than across-the-board,” said the source.

“There is rooming for cutting RRR in the next 1-2 months as China’s economy faces downward pressure and also uncertainties from a trade war with the United States.”

PBOC implemented a targeted reserve cut of 100 basis points for selected Chinese banks in April, with the goal of helping them repay off the medium-term lending facilities that it provides, as well as shoring financial inclusion by making more funds available to medium-sized banks that are more inclined to lend to small businesses.

The move released 1.3 trillion yuan in total, with 900 billion yuan to be used by larger Chinese banks for MLF repayments, and 400 billion for smaller bank to lender to micro enterprises.

Chinese analysts have also speculated that a recent spate of bond defaults concentrated amongst private enterprise could push PBOC to cut the reserve ratio prior to the end of 2018.

Beijing’s deleveraging campaign appears be to proving effective, with official data pointing to a decline in the corporate ratio by 0.7 percentage points last year to 159% of GDP, for the first fall since 2011.

Total social financing also posted an on-month plunge of 50% in May to 760.8 billion yuan.

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