MNI: Chances Rise PBOC Cuts RRR As Gov Debt Issuance Increases

The People’s Bank of China will consider cutting the reserve requirement ratio as soon as this quarter as it aims to support the accelerated issuance of government bonds while enhancing control over idle funds, policy advisors and economists told MNI.

An RRR cut in Q2 will help the central bank meet medium- and long-term liquidity needs, reduce financial institutions funding costs and create a more favourable liquidity environment, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance, pointing to the Politburo’s unexpected call to use the RRR tool, alongside other easing measures, at the April 30 meeting.

Investors have interpreted the Politburo’s statement, similar to its April 2020 call for reduced social financing costs, as a signal for further RRR reduction. The Bank cut the ratio by 50 basis in late January, unlocking CNY1 trillion of liquidity into the interbank market and driving the average RRR across financial institutions lower to 7%.

Zhao Quanhou, director at the Financial Research Center of the Chinese Academy of Fiscal Sciences under the Ministry of Finance, said a reduction will occur later this year, pointing to statements made since March by high-ranking PBOC officials, including Governor Pan Gongsheng, that noted potential for a lower RRR.

ISSUANCE SUPPORT

Chinese central government bonds and local-government debt will see increased issuance from this quarter, which will provide qualified assets to wholesale investors and help soak up idle funds circulating inside the financial sector, Zhao added.

Authorities plan to issue about CNY7.7 trillion of CGBs and local-government debt between May to December, which will drain liquidity from the interbank market, according to Dongwu Securities.

Lian Ping, chairman at the China Chief Economist Forum, noted most of the government debt must be issued before Q4 to raise funds for infrastructure investment. Any delay would weaken local governments’ capacity to boost the economy, he said, predicting at least one 25bp cut this year, either in Q2 or early Q3.

More easing moves, including policy rate cuts and additional RRR reductions, would depend on external policy and economic conditions, Lian said, pointing to the yuan’s weakness against the greenback. (See MNI: More Yuan Volatility Ahead, PBOC Vigilant)

IDLE FUNDS & YIELDS

However, some economists told MNI the Bank’s present focus on idle funds and the recent fall in long- term bond yields – highlighted in the latest monetary policy report earlier this month – made a cut less pressing. (See MNI: PBOC Wary Of Rapid Long-dated CGB Yield Decline)

Wen Bin, chief economist at China Minsheng Bank, said the PBOC may choose to delay an RRR reduction to Q4 due to the current loosening of liquidity conditions. The Bank would prefer to stabilise the long-term CGB yields, and it may increase medium-term lending facility injections and open market operations to meet the additional liquidity demand from bond issuance, he added.

The need for an RRR cut to support ultra-long special treasuries has also reduced as the Ministry of Finance will issue the CNY1 trillion in treasuries smoothly over seven months from May, reducing the concentrated shock on liquidity, Wen noted.

The ministry will issue CNY300 billion 20-year, CNY600 billion 30-year and CNY100 billion 50-year ultra-long special treasuries seven, 12 and three times separately from May to November, according to the plan announced on its website.