Thought September 06, 2019 / 01:50 pm UTC

China: PBoC Cuts Reserve Requirement Ratio; Expect More Easing

By Jeff Ng

We expect one more reserve requirement ratio (RRR) cut by December after the People’s Bank of China (PBoC) cut the RRR by 0.5 ppt on September 6. We are also forecasting two more 5-bp rate cuts on the loan prime rate (LPR), with one later this month. 

This is the third cut in the RRR this year. The move will free up CNY900 billion of liquidity, aimed at boosting lending activities. We previously highlighted the weaknesses in medium enterprises, as opposed to some pickup in activity from big enterprises. 

The RRR is now 13% for large banks and 11% for medium and small banks. We expect one more RRR cut by December 2019 of a similar 50 bps.

China introduced a new LPR as it looks to reform the country's financial markets. We expect a 5-bp cut to the LPR on September 20 and another 5-bp cut in December. 

The PBoC move signaled at more accommodative action for the slowing economy. GDP growth slowed to 6.2% y/y in Q2 from 6.4% in Q1, and momentum points toward further weaknesses.

While the PBoC has shifted to a more accommodative stance, we still do not expect it to be broad-based; the Bank will be unwilling to destabilize the economy by ramping up further leverage baggage.

Meanwhile, the government has signaled its willingness to take more action to stabilize the economy. We continue to expect further measures from government spending to prevent a hard economic landing. However, we doubt this will provide a large boost to the economy.

As a result, momentum is likely still tilted toward a moderate slowdown for the economy. This comes as July and August data continued to show a moderation compared to the start of the year. 

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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.