MNI EXCLUSIVE: PBOC Seen Holding Off Chinese New Year RRR Cuts

The People's Bank of China is likely to rely on short-term facilities to address tightening liquidity before the Chinese New Year holiday rather than cut banks' reserve requirement ratios as Covid prevention measures subdue demand for cash and monetary policy makers remain wary of feeding financial bubbles, policy advisors told MNI.

Unlike in previous years, the central bank has yet to step up its operations, draining a net CNY178 billion from the interbank market and surprising investors by failing to roll over the maturing MLF in its entirety mid-month. Meanwhile, the weighted-average 7-day repo rate for deposit institutions has jumped 32 basis points to 3.0935%, the highest since March 2018, while the overnight repo rate has approached the highest since 2015 at 3.0017%.

For the past three years, the central bank has cut reserve requirements around the holiday, but advisors said this time it is likely rely on tools such as the temporary liquidity facility if necessary.

Demand for cash to meet travel and holiday expenses could fall this year as migrant workers stay put due to virus-prevention measures, said Zhang Yongjun, deputy chief economist at the China Center for International Economic Exchanges. The central bank will probably use reverse repos and the medium-term lending facility to inject liquidity, he said, noting that money supply measures M2 and M0 were growing at a relatively fast 10.1% and M0 at 9.2% as of the end of December.

Passenger numbers during the week-long Chinese New Year holiday, which begins Feb. 11, could total about 1.7 billion this year, almost half 2019's level but above the 1.48 billion last year, when the initial outbreak disrupted travel, according to the Ministry of Transport.

Financial conditions remain benign and the mid-point of money market rates has been low, said Wen Bin, chief researcher at China Minsheng Bank, noting that a reserve requirement cut would send a strong easing signal and could fuel asset bubbles. He expects the central bank to fill the liquidity gap with 7- and 14-day reverse repo operations and the MLF.

TEMPORARY TOOLS

Cash demand, treasury deposits and maturing monetary tools have pushed the liquidity gap to about CNY1.5-1.6 trillion, Minsheng Securities estimates. About CNY1.06 trillion of monetary tools will mature during the three weeks starting Jan. 25, including CNY240.5 billion of targeted MLF this week and CNY200 billion of MLF on Feb. 17, according to financial data provider Wind.

If necessary the central bank could introduce temporary tools to deal with any liquidity squeeze, which should anyway pass after the festival, said Chen Daofu, deputy director at the Financial Research Institute of the Development Research Center of the State Council.

The PBOC launched a temporary liquidity facility before the 2017 spring festival and provided a contingent reserve arrangement in 2018.

The PBOC describes its current policy stance as "prudent", a neutral setting between loosening and tightening.

Growth of the M2 measure of broad money could slow from 2020's 10.1%, dipping below the rate of increase in nominal GDP and implying marginally tighter monetary policy, said Feng Xuming, senior fellow at the National Academy of Economic Strategy at Chinese Academy of Social Sciences. The PBOC's settings have been returning to normal since the fourth quarter of last year after pandemic loosening, he said.

The need for any additional easing has been reduced by measures including an extension of pandemic loan deferments for small businesses, said Zhang, who expects M2 may grow at about 9% this year.