24 October 2016
Lu Lei said the RRR cut will help expand the money supply. Photo:
Lu Lei said the RRR cut will help expand the money supply. Photo:

PBoC emphasizes prudence despite perceived easing of policy

China’s central bank is maintaining its prudential stance on monetary policy despite the largest cut in the reserve requirement ratio (RRR) for banks since the 2008 financial crisis, the Hong Kong Economic Journal reported Tuesday.

The 100 basis point (1 percentage point) reduction is to partly offset the effect of slowing growth in funds outstanding for foreign exchange, the report said, citing Lu Lei, director-general of the research bureau at the People’s Bank of China (PBoC).

Lu said in an interview with PBoC mouthpiece China Financial News that, given a shortfall of about 1 trillion yuan (US$160 billion) in the growth of funds outstanding for foreign exchange during the first quarter, the cut in RRR can hedge against the negative effect on the expansion of M2, the broad money supply.

The country’s M2 growth slid to 11.6 percent at the end of March, prompting the PBoC to take action.

Analysts, however, are of the view that the large RRR cut signals a loosening of monetary policy to a certain extent.

Mizuho Securities Co. Ltd. said the RRR was cut to give a boost not only to the economy but to the stock market as well. 

The brokerage expects another cut in interest rates and the RRR in May.

Meanwhile, analysts at Bank of China (Hong Kong) Ltd. said the recent RRR cut has laid the foundation of a loosening cycle to make room for an uptrend in bond yields.

The Wall Street Journal said the PBoC is taking a loosening stance with measures similar to the European Central Bank’s Long Term Refinancing Operations to ensure liquidity in the market by extending three-year low-interest loans to banks with local government debts as collateral, while encouraging bank lending to small and micro enterprises.

Translation by Vey Wong

[Chinese version中文版]

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