MNI: 'Central Mother' Comes To Rescue As Banks Cry For Cash

--PBOC Announces Lunar New Year RRR Cut Of 2 percentage Points 

     BEIJING (MNI) - The People's Bank of China showed its mercy on the final

working day of 2017 by offering a potential liquidity feast to banks during the

coming Lunar New Year holiday via a temporary Reserve Requirement Ratio cut.

     The announcement comes as financial institutions are suffering through a

liquidity crunch at the end of the year and face even greater cash demands as

China heads into the traditional Lunar New Year holiday in mid-February. 

     The central bank -- known in trading circles as the "Central Mother"

because of its penchant for deftly stepping into the market just as banks grow

desperate for another liquidity feed -- announced Friday morning that it will

set up a "temporary required reserves usage arrangement," allowing commercial

banks to take out and use no more than two percentage points -- 200 basis points

-- of their required reserves parked in the PBOC for a period of 30 days. 

     "The move is for maintaining the stability of money markets, considering

the current liquidity demands of banks due to a large amount of cash spending,"

the PBOC explained.

     Hu Yuexiao, chief analyst with Shanghai Securities, told MNI that the

central bank was offering the measures as lending rates of cross-year capital

have risen to multiyear highs at year-end. "We can see repo rates at stock

exchanges have surged to the level in 2013 when the [last major] liquidity

crunch happened," he said, "The PBOC has to step in." 

     This is the first time the PBOC has cut the RRR since March 1, 2016, when

the central bank cut the RRR by 50 bps to 17% from 17.5% for big banks. The PBOC

also announced in September that it would offer a targeted RRR cut of at least

50 basis points for banks that meet certain requirements for lending to small

and micro-size business and the agricultural sector.

     The PBOC also took action during last year's New Year's season to inject

liquidity into the market, implementing its Temporary Liquidity Facility, or

TLF, which succeeded in injecting approximately CNY600 billion into the

interbank market. 

     But the latest RRR cut is being called "an upgraded TLF" by traders and

analysts. It requires no collateral of banks and comes with no lending costs --

a great boost to banks, which currently face collateral shortages and high

funding costs. 

     In addition to commercial banks, this year's measure is expected to be

available to large joint-stock banks. Last year's TLF only covered the five big

state-owned banks. 

     Li Qilin, an analyst with Lianxun Securities, said in a note that he

expected the RRR cut would release about CNY1.8 trillion in liquidity. 

     "It will effectively deal with the liquidity tightness in the short term,"

he said. 

     China International Capital Corporation (CICC), a joint-venture investment

bank, said the RRR cut would be launched around Jan. 16, since the Lunar New

Year falls on Feb. 16 and the duration of the temporary measure is 30 days. CICC

said the measure would help big banks pass through the cross-year liquidity

shortage, while small banks and non-banking institutions would also benefit. 

     However, the temporary measure does not mean the central bank is loosening

its tight "prudent and neutral" monetary policy, meaning liquidity tightness

could return after the Lunar New Year holiday. 

     "The experience last year told us that liquidity would tighten at a rapid

pace shortly after the New Year as a big sum of open-market operation

[short-term loans] and Medium-term Lending Facilities would mature," Li said.

"We should bear in mind that the central bank's stance of tight monetary balance

and deleveraging has not changed."

     CICC noted that China's official RRR will eventually "normalize" and settle

at a lower level than the current 17%. The elevated official RRR has increased

the opportunity cost for banks and prompted them to engage in "regulatory

arbitrage," CICC said.

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

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

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