5 Minute Read by Reuters Staff (Reuters) – LONDON (Reuters) – China has reduced the reserve requirement ratio (RRR) for all banks by 50 basis points, freeing up about 1 trillion yuan ($154 billion) in long-term cash to support a slowing post-COVID economic recovery. PHOTO FROM THE FILE: The People’s Bank of China (PBOC), the country’s central bank, is seen in Beijing, China, on September 28, 2018. Jason Lee/Jason Lee/Jason Lee/Jason Lee/Jason Lee/ The following are the opinions of analysts on the move: UBS LONDON’S HEAD OF EM STRATEGY, MANIK NARAIN “It’s not apparent that it’s releasing the floodgates of liquidity into the system; I believe it’s China showing the world that there’s a limit to how much tightening (in the money markets) it’ll tolerate.” “China was first in, first out (with COVID policy support) – it effectively began tightening (monetary policy) in Q3 last year – so now it’s possible that the message is, if you’re thinking about global significance, that the PBOC is demonstrating that economies are still somewhat fragile and inflation is unlikely to be too damaging over the medium term.” CHIEF ECONOMIST, PINPOINT ASSET MANAGEMENT, HONG KONG ZHIWEI ZHANG “Some market analysts expect a targeted RRR drop for a segment of the banking industry, but the PBOC slashed all banks’ RRRs. We continue to predict additional slowing in June macro data, notably in consumption. April and May retail sales were already below expectations.” “Furthermore, China’s uneven recovery offers a troubling picture for those nations that have only recently begun to recover from the pandemic. The new normal of economic growth could be slower than before COVID, and it could endure considerably longer than anticipated.” DEPUTY HEAD OF RESEARCH, ASHMORE GROUP, LONDON, GUSTAVO MEDEIROS “The reserve requirement ratio was reduced by 50 basis points earlier than projected. To allow for additional local government bond issuance, China is anticipated to loosen monetary policy through RRR decreases and OMO operations. This would help fund vital infrastructure projects like railways and 5G deployment. We expect fiscal policy to remain focused on the pandemic’s most vulnerable sectors, such as small businesses. We also expect the property market’s macroprudential tightening to continue.” CHIEF ECONOMIST GREATER CHINA, ANZ, HONG KONG RAYMOND YEUNG “We believe the PBOC’s action today is designed to show that China has a number of monetary policy tools at its disposal. The authorities continue to stress the flexibility of their policy approach.” “Because it will release nearly 1 trillion Chinese yuan in funds, today’s RRR drop is almost akin to a broad-based easing. We regard today’s decrease as a response to the heightened demand for liquidity seen in July, which has resulted in recent market instability.” SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS JULIAN EVANS-PRITCHARD “The PBOC, in our opinion, is attempting to persuade banks to decrease lending rates without changing its broader policy settings, like as quantitative credit limitations. If we are correct, the RRR drop will have minor economic consequences in the short run. History implies that the quantity of credit available, rather than its price, determines China’s economic performance.” “The bond market appears to be reacting to this shift in the cycle by pricing in lower interest rates over the medium run, as we had predicted. Even before the RRR announcement, signals that a cut was on the way caused China’s 10-year government bond yield to fall for the first time this year.” HEAD OF ASIAN ECONOMICS, OXFORD ECONOMICS, HONG KONG LOUIS KUIJS “The PBOC acted on the State Council’s request to reduce the RRR two days sooner… The 50 basis point reduction implies a significant infusion of liquidity on its own.” “The PBOC’s wording around the cut, on the other hand, is telling. It says it’s needed to make up for the impact of tranches of its MLF facility expiring in July and August. This shows that, as expected, the central bank sees this as primarily a liquidity management operation rather than a move signaling a shift toward a more accommodative overall monetary policy stance.” ELWIN DE GROOT, RABOBANK, AMSTERDAM, HEAD OF MACRO STRATEGY “I see it as more of a fine-tuning than a signal that additional monetary easing is on the way.” “It was already signaled to some extent since we had seen some tightening in Chinese money markets, and this is primarily to relieve these tensions,” says the official. MORGAN STANLEY, HONG KONG, LAURA WANG, CHIEF CHINA EQUITY STRATEGIST “We believe the PBOC’s broad-based 50 basis point RRR drop will help to calm investor nerves after days of heightened volatility following the July 6 capital market announcement, which raised serious concerns about ADRs and offshore Chinese listings.” “Within Chinese stocks, we continue our strong preference for the A-share market. The A-share market, we feel, will benefit the most from the RRR cut in terms of mood and liquidity. We continue to advise against broad-based bottom-fishing, particularly in categories where regulatory uncertainty exists (data-heavy tech companies, ADRs, and so on).” Stella Qiu, Marc Jones, Tom Arnold, and Karin Strohecker contributed reporting, while Nick Macfie edited the piece./n
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