MNI EXCLUSIVE: PBOC Turns To Structural Tools To Loosen Policy

     BEIJING (MNI) - The People's Bank of China will use structural tools to

ease liquidity in a bid to offset the effects of deleveraging, deal with any

economic downturn and pre-empt any fall out from the looming Sino-U.S. trade

war, MNI was told by people close to the central bank.

     "The targeted (reserve requirement ratio) cut is in line with political and

economic requirements as supporting small and medium companies is a target of

the policymakers and the society-wide liquidity shortage has pressured economic

growth," Sheng Songcheng, a counsellor to the PBOC who has served at the Chinese

central bank for over 20 years, told MNI on Monday.

     The PBOC announced Sunday it will cut the RRR for commercial banks by 50bp

from July 5, unlocking CNY700 billion. This is the third "targeted" RRR cut this

year, sitting alongside the contingent RRR cut over the Chinese New Year,

releasing CNY450 billion, and the RRR cut/MLF swap in April, injecting a further

CNY400 billion.

     The PBOC has been carefully balancing its targets of stabilizing economic

growth and solving the huge pile of debt in the economy, with structural tools,

including targeted RRR cuts and the expansion of MLF collateral, to the fore.

     "Against the background of an economic downturn and the deleveraging

campaign, monetary policy should loosen at a marginal pace. The central bank

should adjust its previous tight bias," Sheng noted. "But the PBOC should be

aware of the pace of loosening, or the achievements from deleveraging will be

ruined," Sheng warned.

--STRUCTURAL LOOSENING

     According to the PBOC statement, Sunday's RRR cut was a more targeted

approach, with CNY500 billion of the liquidity released from this RRR cut being

used to facilitate debt-to-equity (DTE) swap projects which have already been

approved (but yet to be executed). A further CNY200 billion is intended for

credit supply to SMCs. 

     However, considering the scale of the latest RRR, the effect is closer to a

broad-based cut, although remaining "targeted" on paper.

     The move is seen as a support to the volatile financial market. "The

operation is directly related to last week's stock market plunge. The central

bank 'mother' is intending to boost market confidence by providing liquidity,

while supporting decelerating economic growth," a second PBOC source told MNI.

     The Shanghai Composite Index was down by 4.37% last week, the biggest drop

in five months, due to worries of Sino-U.S. trade war, alongside signals the

economy has been impacted by the squeezed credit supply. 

     China's major economic indicators for May failed to meet expectations, with

investment and consumer spending both posting sharp slowdowns, total social

financing growth also dramatically lower, triggering concerns regarding both

credit growth and default risks.

     "The refunding channels for SMCs have been largely blocked by the tough

regulations, which will impose a big influence over the economy. Plus the

possible trade war, all these (factors) are very concerning," Sheng told MNI.

     --ACTUAL EFFECTS

     From the coverage of the RRR cut, the state-owned enterprises(SOE) sector,

the main objective of DTE projects, will be the largest beneficiary, indicating

the central bank will focus more on SOEs during any debt default jitter, while

private sector SMCs will remain vulnerable to the slowdown in credit provision.

     Moreover, the PBOC may drain liquidity via its open market operations after

the RRR cut, possibly triggering further tightening in the interbank market

under pressure from end-quarter cash demands.

     "More efforts from the central bank to adjust the policy setting and

reverting to a more 'neutral' stance will be seen, including more targeted RRR

cut," the second PBOC source said.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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