The People’s Bank of China (PBoC) last week cut banks’ reserve requirement ratio (RRR) by 50 basis points, a move that came as a surprise for some market participants.
The decision does make sense given the macroeconomic situation.
Funds outstanding for foreign exchange are falling amid slowing economic growth and market liquidity usually tightens ahead of the Lunar New Year holiday.
The RRR cut will help ease liquidity and bolster economic growth.
But it could not come sooner than the market had expected. The decision was taken in order to give ongoing reform time to gain momentum.
In fact, the Chinese central bank is expected to introduce further RRR cuts this year to stem the risk of capital outflow.
The move will help Chinese banks expand lending, which in turn will pave the way for further economic reform.
Also, it will help ease concerns about credit risk and help stabilize economic growth.
PBoC chief economist Ma Jun has made some good points recently.
He said China’s capital and financial accounts have shown deficits despite a surplus in the current account.
And funds outstanding for foreign exchange are no longer a source of long-term liquidity since the central bank stopped frequent interventions in the foreign exchange market.
The PBoC has had to rely on other channels and instruments to pump money into the system.
RRR cuts will help Beijing maintain reasonable growth in the monetary base and keep liquidity at proper levels to ensure stable growth in loans and social financing.
Meanwhile, the economic slowdown has prompted the PBoC to introduce some quick fixes.
The Purchasing Managers’ Index continues to deteriorate, real estate investment growth continues to moderate, inflation remains low while real interest rates are poised to rise.
Also, the A-share market has run out of steam.
Last week, the Shanghai Composite Index extended its losing streak to a fifth straight day, with the market buffeted by a stream of negative news recently.
A top management reshuffle in China Minsheng Bank shook market sentiment, weighing on bank, insurance and brokerage plays.
With the earnings season on the horizon, company results look set to disappoint amid fragile macroeconomic growth.
In addition, as many as 24 new listings have been approved by mainland authorities, which will drain significant capital from the market.
Investors will switch to new shares to mitigate risk ahead of the holiday, sending ripples to the secondary market due to limited liquidity.
The renminbi spot exchange rate against the US dollar has weakened sharply in recent days, making investors more cautious.
This article appeared in the Hong Kong Economic Journal on Feb 9.
Translation by Julie Zhu
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