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April 20, 2018

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China to keep prudent policy despite ratio cut

DESPITE a surprise cut in the reserve requirement ratio for most commercial and foreign banks, China sees no sign of monetary easing and will maintain its prudent and neutral policy stance to ensure stable and reasonable liquidity.

The People’s Bank of China said late Tuesday that it will cut the RRR for banks except policy lenders by 1 percentage point from Wednesday to help small businesses, and to improve overall stability and liquidity in the economy.

Zeng Gang, a financial researcher with the Chinese Academy of Social Sciences, said the central bank’s move was a neutral operation, as the amount of the net injection is small and will not change the current prudent and neutral trend in monetary policy.

Swiss investment bank UBS agreed that the RRR cut was more of a move to normalize the central bank’s liquidity operations and to lower banks’ funding costs.

Instead of a “strong easing signal,” the RRR cut has been resumed as a more regular liquidity operation tool, UBS said in a research note.

The PBOC has recently managed market liquidity through targeted moves rather than across-the-board adjustments of interest rates or RRR.

The last cut to the benchmark RRR was in March 2016, when the rate was lowered by 0.5 percentage points.

A targeted RRR cut was ordered earlier this year to encourage inclusive financing by commercial banks, such as credit support for small and micro enterprises, startups and agricultural production.

Gao Yuwei, a Bank of China researcher, dismissed concerns that the RRR cut, which came on the heels of the release of China’s first quarter GDP, was aimed at addressing downward pressure on the economy.

The Chinese economy expanded 6.8 percent year on year in the first three months of this year, flat from the previous quarter and above the country’s annual growth target of “around 6.5 percent,” official data showed on Tuesday.

Gao said the move was largely to ease structural problems like financing difficulties for small and micro enterprises, and providing payment for medium-term lending facility will reduce the interest burden on financial banks and allow them to better support the real economy.

Describing China’s 6.8-percent first-quarter GDP as “decent,” UBS also believes that there is no need for China to ease monetary policy materially to secure its annual GDP target for now.

“Recent market turmoil and fragile sentiment amid rising trade frictions may be a minor policy concern,” UBS said.

Investors responded positively to the RRR cut, with the Shanghai Composite Index closing up 0.8 percent at 3,091.4 points on Wednesday.

Looking ahead, economists believe that it is unlikely for the PBOC to notably ease the monetary policy as risk prevention is still a priority for 2018.

The central bank has said that it will keep a stable, reasonable level of liquidity and oversee moderate growth of financial credit and social financing.

Wen Bin with China Minsheng Bank said he expects that China’s monetary policy, while remaining prudent and neutral, will be more flexible in the future, with more diverse and structural policy tools to be employed.




 

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