The People's Bank of China (PBoC) cut the reserve requirement ratios (RRR) for some banks by 50 bps on June 24. We expect one or two more RRR cuts of equal magnitude by the end of the year.
The PBoC announced on Sunday that it would cut the RRR for some banks by 50 bps, the third cut this year. The cuts, which will take effect on July 5, will lower the RRR from 16% for large banks and 14% for smaller banks.
We recently noted that softening growth in China, and among smaller corporates in particular, may trigger looser policies. Indeed, the cuts are meant to increase liquidity in the financial system by $108 billion in order to boost lending to smaller firms.
Aimed at debt-for-equity swaps, the cuts are also intended to counter the bearish trend in the stock market. Since China announced retaliatory tariffs against the U.S. on June 15, the Shanghai composite has fallen by around 5% (continuing a downward trend that began in January), and USDCNY has surged from 6.40 to above 6.50.
China still has sizable FX reserves they could use to support stability—about $3.11 trillion as of May 2018. For now, however, China may avoid deleveraging in order to maintain financial stability.
On June 14, we wrote that we expected one 50-bp cut of the RRR by the end of the year. We now expect one or two in addition to last Sunday's, for a total of 100 bps.