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Free AccessREPEAT: Economists: Tweak Bank Reserves To Ease Cash Crunch
Repeats Story Initially Transmitted at 10:00 GMT Aug 2/06:00 EST Aug 2
BEIJING (MNI) - Chinese economists have suggested that the People's Bank of
China could make some changes in its bank reserve requirement system (RRS) to
deal with the tightening liquidity situation in the process of stabilizing
leverage in the financial sector.
In a recent commentary in the Financial News, a journal run by the PBOC,
Zong Liang, chief economist at Bank of China, said the regulator could consider
setting up a new multilevel RRS -- a legally required minimum deposit reserve
ratio of 7% and a voluntarily adjusted one with a ratio of 10% -- to reduce
pressure on liquidity and avoid the negative effects of a direct reduction of
the current reserve requirement ratio (RRR).
Zong also suggested that commercial banks could borrow from the central
bank using the additional adjusted reserve money stored at the central bank as
collateral, particularly as regulations tighten and key macro-prudential
assessments of banks occur.
The RRR refers to customer deposits that lenders must set aside as
reserves, so a rise or cut in the ratio would allow the central bank to reduce
or increase liquidity available in the economy, with an increase usually
designed to boost consumer spending and capital investment.
"The current money supply system mainly relies on the PBOC's open-market
operations and new monetary instruments including the Medium-term Lending
Facility, but the instruments require qualified bonds as collateral, which lower
banks' liquidity coverage ratio," a source at an asset management department of
a joint-stock bank told MNI. "In this situation, fine-tuning of the RRS may be a
better choice, considering the National Financial Work Conference has ranked
liquidity stability as the top priority for future financial regulation, but an
overall reduction of the RRR is impossible under a prudent and neutral monetary
policy."
The latest announced cut of the RRR in China happened in March 2016, when
the PBOC lowered the RRR by 50 basis points to 16.5% for big banks in an attempt
to bolster a slowing economy after GDP slowed to a 25-year low of 6.9% in 2015.
China actually allowed its five biggest banks to temporarily lower their
required reserve ratios in February to deal with the crash crunch before Chinese
New Year, according to Caixin Magazine, a prominent Chinese financial journal.
The full 1% RRR reduction was expected to inject CNY600 billion into the
interbank market, but the reduction only lasted for 28 days, Caixin reported.
Lian Ping, chief economist at Bank of Communications, said last week in the
Financial News that the PBOC could cut the RRR of banks that mostly loan to
small and medium-size companies, because those companies bear most of the burden
of rising funding costs as liquidity tightens.
"As the reduction of the foreign exchange position has narrowed since the
beginning of 2017, an RRR cut could send a strong monetary policy easing signal
to the market, so there seems no need to reduce RRR, at least not this year,"
Lian added.
Another trader with one of the big four banks told MNI that Zong's
suggestion of a ratio of 10% for the voluntarily adjusted reserve would be "too
high."
"The influence would be the same as a full RRR reduction, which is
unrealistic currently," the trader said. "The problem is how high the lending
rate should be set while commercial banks borrow from the PBOC using the
additional adjusted reserve money as collateral," he said, adding that Zong's
plan could come into play in the future.
--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com
--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.