MNI Analysis: PBOC Unexpected RRR Cut Marks Easing Policy Bias

- Policymakers To Boost Domestic Demand to Buffer Economic Uncertainty

- New PBOC Leadership Changes Operations by injecting Long-term Liquidity 

     BEIJING (MNI) - The PBOC's decision to cut its reserve requirement ratio

shows the bank's easing bias as it aims to offset pressures from deleveraging

and the threat of an economic downturn.

     The People's Bank of China announced unexpectedly late Tuesday that it

would cut the amount of cash that most banks are required to hold in reserve by

one percentage point- the first across-the-board reduction since March 2016

(with the exception of the targeted RRR cut effective early this year) - to

release cash into the banking system.

     The cut could release about CNY1.3 trillion additional liquidity into the

banking system. However, about CNY900 billion of the released funds will be used

to repay central bank loans via Medium-term Lending Facility, resulting in a net

injection of CNY400 billion funds for Chinese banks, according to a statement on

PBOC's website.

     The large amount of deposit reserves has been a controversial point. The

central bank has been resisting such a move over the last two years due to

concerns that doing so might send a strong easing signal and hinder its

deleveraging campaign and to cause depreciation pressure on the yuan.

     - RELAXED POLICY

     The central bank mainly relied on short-term monetary tools including MLF

and SLF with high interest rates to inject liquidity over the past two years in

a bid to force financial deleveraging, which has squeezed banks' interest

margins. The margin pressure on banks may rise materially after the announcement

of asset management regulation policies, and the advanced RRR cut may help to

alleviate the pressures felt by banks.

     The cut will supply more liquidity to smaller banks, alleviating the

imbalanced liquidity problem and stabilize liquidity conditions. Replacing MLFs

which need frequent roll-over with available cash released by lower RRR will

also stabilize liquidity conditions and expectations.

     - DOMESTIC DEMAND BOOST

     The PBOC's move came after official data released earlier on Tuesday showed

that China's economy had grown at 6.8 per cent in the first quarter, unchanged

from last quarter. However, indicators have showed the economy now faces the

threat of an investment slowdown at home and a trade war with the U.S.

     According to PBOC's statement, it would require financial institutions to

use the extra funding to provide loans to small and micro companies, adding that

this would be included as a requirement in its quarterly macro prudential

assessment test for banks.

     The RRR cut will reduce the funding costs of small businesses by decreasing

rates banks demand for loans. This could drag up the private sector investment,

which showed solid y/y growth in March of 8.9%, outperforming the overall

fixed-asset investment growth of 7.5%.

     The new PBOC leadership seems to have changed the operation of its monetary

policy by injecting long-term funding via cutting RRR to provide a better

environment for financial risk prevention and domestic economic growth.

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

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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