Required Reserve Cut Seen as Less Likely After PBOC Unleashes 400B Yuan in Two Days


Domestic analysts say the likelihood of another cut to China’s required reserve ratio in the near-term has fallen after the Chinese central bank released 400 billion yuan in liquidity over a two day period.

The People’s Bank of China (PBOC) announced on 17 April that it had conducted 160 billion yuan in repo operations and 200 billion in medium-term lending facility (MLF) operations on the same date, as part of efforts to maintain “rationally ample liquidity” in the Chinese banking system on the basis of the current term structure of liquidity demand.

The move brought the total amount of liquidity released by PBOC during a two day period to 400 billion yuan, following 40 billion in repo operations on 16 April.

Wang Youxin (王有鑫), researcher with the International Financial Research Institute of the Bank of China, said to Securities Daily that given the recent performance of the Chinese economy as well as liquidity conditions, the necessity of an interest rate cut or cut to the required reserve ratio had fallen.

The “open-market operations + medium-term lending facilities” operating model adopted by PBOC is capable of effectively ironing out short-term market fluctuations, and any future cuts to the required reserve ratio will depend upon PBOC’s reading of international and domestic economic conditions.

Wang Qing (王青), chief macro-analyst with Dongfang Jincheng (东方金诚), said that the regular first quarter meeting of PBOC’s monetary policy committee convened on 15 April assessed current economic conditions as “displaying healthy growth,” for an improvement compared to “maintenance of stable growth” the preceding quarter.

Wang believes that PBOC see downward pressure on the Chinese economy easing in the near future, as Sino-US trade negotiations achieve progress and consumer, investor and financial market confidence revive.

Official data for March also points to a sizeable rebound in lending, total social finance and M2 growth, indicating that PBOC’s efforts to “smooth out” monetary policy transmission mechanisms have achieved progress, and the Chinese economy is seeing the effects of “loosened credit.’

Wang also points out that the current liquidity term structure is undergoing more pronounced divergence, with “gathering in of the short” and “stabilisation of the long.”

According to Wang this was the chief reason behind PBOC’s reduction in ongoing MLF earlier this week, as well as its expansion of repo operations.