State Media Says China Has Ample Room for Further Reserve Ratio Cuts

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A new report from Xinhua points to the possibility that the People’s Bank of China (PBOC) will further cut the required reserve ratio by as much as 150 basis points this year in order to maintain “rationally ample” liquidity levels.

PBOC has already launched three targeted cut to the required reserve ratio since the start of 2018, as part of efforts to prop up liquidity and shore up financial inclusion.

The latest reduction will see the required reserve ratio for a range of Chinese banks reduced by 0.5 percentage points starting from 5 July, in order to provide support to China’s debt-for-equity swap initiatives and expand lending to small and micro-enterprises.

China’s central government has also made a key adjustment to the terms it employs to describe monetary policy.

While the 2018 first quarter monetary execution report made reference to “maintaining rationally stable liquidity,” the latest meeting convened by China’s State Council on 20 June refers to the maintenance of “rationally ample liquidity and stable financial operation.”

The three reserve ratio reductions implemented thus far this year have shifted market expectations towards structural loosening, while many observers expect monetary policy tools to increasingly rely upon a combination of required reserve cuts and interest rate hikes.

Chinese analysts generally see further room for reserve ratio cuts in future,as Beijing’s efforts to stymie systemic financial risk drives off-balance sheet business back onto the balance sheets of banks.

Liang Hong (梁红), chief economist with China International Capital Corporation, sees a further reduction of 150 basis points this year, with the expectation of an expansion of on-balance sheet lending.

Lu Zhengwei (鲁政委), chief economist with Industrial Bank., sees room for further reduction in the reserve ratio by between 0.5 and 1.5 percentage points this year.

“Historical data indicates that the statutory reserve adjustment is a definite forerunner of M1 growth,” said Lu. “For this reason, in the second half of 2018 year-on-year M1 growth is expected to see a rebound.

“A possible reserve reduction this year will trigger a decline in the growth of the central bank’s total assets, and money market rates could see a gradual decline.”

A report from Industrial Securities indicates that while China’s monetary policy will not diverge from the overall theme of stability and neutrality, Beijing will further strengthen pre-emptive adjustments or micro-adjustments in order to deal with increasingly complex domestic and overseas conditions.

The Chinese central bank will focus more on stabilising market expectations, as well as respond more rapidly to external shocks.

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