Thought June 25, 2018 / 01:45 pm UTC

People's Bank of China: More RRR Cuts Likely

By Jeff Ng

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. 

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I, Jeff Ng, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.