China Economists: Tweak Bank Reserves To Ease Cash Crunch

     BEIJING (MNI) - Chinese economists have suggested that the People's Bank of

China could make some changes in its bank reserve requirement system (RRS) to

deal with the tightening liquidity situation in the process of stabilizing

leverage in the financial sector.

     In a recent commentary in the Financial News, a journal run by the PBOC,

Zong Liang, chief economist at Bank of China, said the regulator could consider

setting up a new multilevel RRS -- a legally required minimum deposit reserve

ratio of 7% and a voluntarily adjusted one with a ratio of 10% -- to reduce

pressure on liquidity and avoid the negative effects of a direct reduction of

the current reserve requirement ratio (RRR).

     Zong also suggested that commercial banks could borrow from the central

bank using the additional adjusted reserve money stored at the central bank as

collateral, particularly as regulations tighten and key macro-prudential

assessments of banks occur.

     The RRR refers to customer deposits that lenders must set aside as

reserves, so a rise or cut in the ratio would allow the central bank to reduce

or increase liquidity available in the economy, with an increase usually

designed to boost consumer spending and capital investment.

     "The current money supply system mainly relies on the PBOC's open-market

operations and  new monetary instruments including the Medium-term Lending

Facility, but the instruments require qualified bonds as collateral, which lower

banks' liquidity coverage ratio," a source at an asset management department of

a joint-stock bank told MNI. "In this situation, fine-tuning of the RRS may be a

better choice, considering the National Financial Work Conference has ranked

liquidity stability as the top priority for future financial regulation, but an

overall reduction of the RRR is impossible under a prudent and neutral monetary

policy."

     The latest announced cut of the RRR in China happened in March 2016, when

the PBOC lowered the RRR by 50 basis points to 16.5% for big banks in an attempt

to bolster a slowing economy after GDP slowed to a 25-year low of 6.9% in 2015.

     China actually allowed its five biggest banks to temporarily lower their

required reserve ratios in February to deal with the crash crunch before Chinese

New Year, according to Caixin Magazine, a prominent Chinese financial journal.

The full 1% RRR reduction was expected to inject CNY600 billion into the

interbank market, but the reduction only lasted for 28 days, Caixin reported.

     Lian Ping, chief economist at Bank of Communications, said last week in the

Financial News that the PBOC could cut the RRR of banks that mostly loan to

small and medium-size companies, because those companies bear most of the burden

of rising funding costs as liquidity tightens. 

     "As the reduction of the foreign exchange position has narrowed since the

beginning of 2017, an RRR cut could send a strong monetary policy easing signal

to the market, so there seems no need to reduce RRR, at least not this year,"

Lian added.

     Another trader with one of the big four banks told MNI that Zong's

suggestion of a ratio of 10% for the voluntarily adjusted reserve would be "too

high."

     "The influence would be the same as a full RRR reduction, which is

unrealistic currently," the trader said. "The problem is how high the lending

rate should be set while commercial banks borrow from the PBOC using the

additional adjusted reserve money as collateral," he said, adding that Zong's

plan could come into play in the future.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MGQ$$$]