MNI:More RRR Cuts Would Pave Way For China Bond Sales-Advisors

MNI (BEIJING ) - The People’s Bank of China is likely to reduce reserve requirement ratios by another 25-50 basis points to support possible additional treasury bond issuance of over CNY1 trillion later this year, but chances of a further cut in the key 7-day reverse repo rate are low unless the 5% GDP growth target continues to be in danger, policy advisors and economists told MNI.

Governor Pan Gongsheng said the Bank plans to cut RRRs by another 25-50bp if necessary later in 2024 on top of a 50bp reduction which was announced on Tuesday, adding to a cut of the same magnitude in February. The cut, part of a package of significant measures, took the average RRR for Chinese banks to 6.6%, Pan said.

With the government facing a fiscal gap of about CNY1.5-2 trillion, another RRR cut could release CNY500 billion to CNY 1 trillion in liquidity to facilitate additional treasury issuance possible in the fourth quarter, an advisor close to policy makers told MNI, mentioning the top legislative body may have a meeting to discuss the new quota in October.  (See MNI: PBOC Seen Cutting Repo Rate Soon, Boosting Bond Trades)

The chances of this will rise if Q3 GDP data, due in October, shows growth below the 5% target, the advisor said, though he noted that the effect on the economy of additional stimulus would take time to be noted given soft demand for credit.

Pan’s surprise press conference also saw him announce a 20bp cut in the 7-day reverse repo rate to 1.5% from 1.7%, the biggest since 2021, as well as guidance to lower the loan prime rate by 20-25bp and a 30bp reduction in the medium-term lending facility. In addition, the Bank introduced measures to boost real estate and equity markets.(See MNI PBOC WATCH: Sept LPR Holds Steady, Further Cuts In Sight)

LIMITED SCOPE FOR RATE CUTS

Lian Ping, chairman at the China Chief Economist Forum, said the 50bp RRR cut will ease liquidity pressures caused by accelerating issuance of project-backed local government special bonds as well as ultra-long special treasuries in Q3 and Q4. Further sales of ultra-long special treasuries or front loading part of 2025’s treasuries quota are possible in Q4, he said.

But the scope for further cuts in interest rates is limited given banks’ narrow net interest margins, despite the PBOC’s move to also cut deposit rates by 20-25bp, he added.

The stimulus was urgently called for given strengthening economic headwinds, reflected by weak demand and deflationary pressures, said Lian, who estimated Q3 GDP would print at 4.9% y/y.

Pan also announced an average 50bp cut in rates paid on existing mortgages on Tuesday. The move will decrease banks' net interest margins by 7bp, reduce operating income by 3%, and lower net profits by 6%, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance.

Ming Ming, chief economist at Citic Securities and a former official at the PBOC monetary policy department, said the Federal Reserve’s rate cut has narrowed the interest rate differential between China and the U.S., supporting the yuan and providing more room for China to lower interest rates. (See MNI: Fed Cut To Help PBOC Ease, Yuan Strengthen)