China: RRR cut signals an easing bias – Standard Chartered

Analysts at Standard Chartered note that the PBoC recently announced that it would cut the reserve requirement ratio (RRR) for large-scale commercial banks, share-holding commercial banks, city commercial banks, non-county rural commercial banks and foreign banks by 1ppt, effective 15 October. 

Key Quotes

“A total of CNY 1.2tn liquidity will be released as a result, of which CNY 450bn will be used to replace medium-term lending facility (MLF) lending maturing on 15 October.”

“The actual liquidity injection will therefore be CNY 750bn. The additional liquidity injection is also intended to offset tax payments later this month, according to the PBoC.”

“The central bank has said the move is intended to replace short-term liquidity with longer-term liquidity at a lower cost for banks and encourage banks to support SMEs, the private sector and innovation-related enterprises.”

“We think the move is motivated mainly by the desire to reduce downside growth risk.”

“We do not think the RRR cut represents a major policy shift, but we see an easing bias in the implementation of the monetary policy to complement expansionary fiscal policy. We expect another 1.5ppt of broad-based RRR cuts in 2019 to prevent a tightening of credit conditions.”