PBOC Unleashes Over 1.4 Trillion Yuan in July, Expected to Further Cut Reserve Ratio in H2

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Th Chinese central bank has stepped up its supply of liquidity since the start of July and is expected to implement further cuts to the required reserve ratio, as escalating trade tensions with the United States cast a shadow over economic growth.

On 23 July the People’s Bank of China (PBOC) launched 502 billion yuan in 1-year medium-term lending facilities (MLF) at rate of 3.3%. On the same date 170 billion yuan in repo agreements matured, for a net liquidity injection of 332 billion yuan.

Figures from financial data provider Wind indicate that the Chinese central bank has released 1.4605 trillion yuan in liquidity via open market operations since the start of July, as compared to just 331 billion yuan during the same period last year.

Markets have already responded to the liquidity increase with a reduction in medium and long-term rates. On 23 July the 1-month SHIBOR fell 2.1 basis points to 3.162%, while the 3 month SHIBOR fell 3.3 basis points to 3.503%, and the one-year SHIBOR fell 1 basis point to 3.923%.

The move follows a shift in the phrasing used to describe China’s monetary policy, with authorities referring to the need for “rationally ample” liquidity, as well as indications from the State Council that fiscal policy will become far more active in the second half.

Some analysts also expect further cuts to China’s required reserve ratio following the three reductions implemented since the start of 2018, as Beijing steps up measures to maintain economic growth amidst escalating trade tensions with the United States.

CITIC Securities’ fixed income team said to 21st Century Business Herald that the latest round of MLF operations sets the stage for the next reserve ratio cut, which it expects to arrive at some point in the third quarter.

Xiong Yuan (熊园), chief macro-economics analyst with Guosheng Securities expects one to two more required reserve ratio cuts in the second half of 2018.

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