Liquidity ease to fuel real economy

The People’s Bank of China, the country’s central bank, unexpectedly announced on Oct 7 that it would cut the reserve requirement ratio for commercial banks by 1 percentage point, effective from Oct 15, in order to maintain domestic liquidity at a “reasonably ample level”. The ratio is the minimum amount of cash that banks must have at all times.

Analysts believe the move will help support the country’s real economy and fend off potential risks brought about by global trade uncertainties and business downturn pressure.

The RRR cut will set free 1.2 trillion yuan ($174.7 billion) in the banking system, according to a statement on the central bank website. Among the newly liberated funds, 450 billion yuan will be used to pay back commercial bank borrowings under a facility which expires on Oct 15.

It will be the third RRR cut this year, after which the ratio for large commercial banks will be reduced to 14 percent.

“There is still room for further RRR cuts this year, as it is an efficient monetary policy tool to supplement liquidity and strengthen bank loans to the real economy,” said Yang Weiyong, an economics professor at the University of International Business and Economics.

The move should supplement liquidity in the financing system, while it doesn’t mean monetary easing or massive economic stimulus, said a PBOC spokesman.

The new policy will take effect before the release of major third quarter economic indicators on Oct 19. Some economists have predicted a slower GDP growth rate in the third quarter due to weak investment and tight regulations on the property sector.

The intensifying Sino-US trade frictions could add pressure on China’s exports, reducing their contribution to total GDP and leading to more downside economic risks, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences.

The RRR cut and liquidity injection may further narrow the interest rate spread between China and the US, especially given that there may still be one more rate hike by the US Federal Reserve this year, Zhang said.

The sudden surge in liquidity is a countercyclical measure to support financing for small and micro enterprises, private companies and innovative players, said Zhao Wei, an analyst at Changjiang Securities.

The PBOC said in a statement that it will “continue to take measures, if necessary”, to stabilize market expectations, and the RRR cut will not put depreciation pressure on the renminbi.

Zhang said it is unlikely the renminbi will depreciate to weaker than seven per dollar by the end of this year.

The renminbi was traded at 6.87 yuan per US dollar as of market close on Sept 28 — before the “Golden Week” National Day holiday. The renminbi recently weakened to over 6.90 yuan as the greenback’s strength resumed.

The PBOC reported on Oct 7 that the country’s foreign exchange reserves slipped to $3.087 trillion by the end of September, down $22.7 billion from August, a monthly drop of 0.7 percent.

Now finding the right balance among interest rates, exchange rates and the country’s balance of payments, has become a major task.

The PBOC’s Monetary Policy Committee held its quarterly meeting on Sept 26. A statement of the meeting said that the country is to “properly manage money supply” and “keep liquidity at a reasonably ample level”.