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PBOC Cuts Reserve Ratio for Some Banks

Bloomberg logoBloomberg 10/7/2018 Bloomberg News

Lending Growth Slowdown© Bloomberg Lending Growth Slowdown (Bloomberg) -- China’s central bank cut the amount of cash lenders must hold as reserves for the fourth time this year, as policy makers seek to shore up the economy amid a worsening trade war.

The People’s Bank of China lowered the required reserve ratio for some lenders by 1 percentage point, effective from Oct. 15, according to a statement on its website. The cut will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan is to be used to repay existing medium-term funding facilities which are maturing, the central bank said.

Reacting to a cyclical slowdown that’s been worsened by Beijing’s anti-debt campaign and the building trade conflict with the U.S., the central bank has maintained an accommodative monetary policy even as the currency slumped. The effects of that policy support plus tax cuts and increased infrastructure funding have yet to fully filter through though, and economic momentum continued to lose pace in September.

“China’s monetary policy is still prioritizing domestic economic problems, despite the escalating trade war and Federal Reserve tightening,” said Ming Ming, head of fixed income research at Citic Securities Co. in Beijing. “The reduction will help ease domestic financing difficulties,” he said.

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The PBOC will continue to adopt a prudent, neutral monetary policy and this reserve ratio cut won’t lead to yuan depreciation pressures, the central bank said in the statement. The cut will apply to large commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks and foreign banks, according to the statement.

The increased liquidity will help support bank lending and credit in general, and unlike that from the PBOC’s medium-term funding tools, it is permanent, which can help banks’ liquidity expectations, according to Wang Tao at UBS Group AG. The cut gives the market a stronger easing signal and can support sentiment, which has been negative on China and emerging markets in the past few days, she said.

Two gauges of activity in China’s manufacturing sector worsened in September, with the official reading for new export orders falling to the lowest reading since 2016.

The lack of progress in negotiations between Washington and Beijing over their trade rivalry means that there’s a good chance the current roster of tariffs on $250 billion of Chinese goods exported to the U.S. will grow, as President Trump has threatened. With little room for optimism on external demand, the outlook for China’s economy hinges increasingly on the effectiveness of targeted stimulus measures being rolled out this year.

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The central bank argued in a separate statement that the move won’t affect the overall amount of liquidity in the economy, as it substitutes for existing instruments, and the remaining money will offset the tax-payment pressure in mid-to-late October. The cut won’t put depreciation pressures on the currency, the PBOC said, which promised to keep the FX market running smoothly.

With markets shut over the past week in China, the onshore currency hasn’t traded. Over that period, the offshore yuan has lost almost 0.3 percent of its value against the dollar.

a screenshot of a cell phone: Ahead of onshore market reopening on Monday© Bloomberg Ahead of onshore market reopening on Monday

“Weaker PMI, negative development in U.S.-Sino tensions, poor weekly performance in Hong Kong during the past week while the onshore equity markets were closed made most investors expect some kind of supportive announcement over the weekend ahead of the reopening on Monday,” said Karine Hirn, a partner at East Capital in Hong Kong.

(Adds comments and more details from sixth paragraph.)

--With assistance from Miao Han and Kevin Hamlin.

To contact Bloomberg News staff for this story: Stanley James in Hong Kong at sjames8@bloomberg.net;Jing Yang in Shanghai at jyang251@bloomberg.net;Yinan Zhao in Beijing at yzhao300@bloomberg.net

To contact the editors responsible for this story: Stanley James at sjames8@bloomberg.net, Jeffrey Black, James Mayger

©2018 Bloomberg L.P.

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