SHANGHAI: A former Chinese central bank official said in a commentary on Tuesday that China’s reduction in bank reserve requirements might assist policymakers deal with swings in US monetary policy and reduce future downward pressure on the yuan. The People’s Bank of China (PBOC) announced on Friday that starting July 15, it will reduce the reserve requirement ratio (RRR) for all banks by 50 basis points (bps), releasing about 1 trillion yuan (US$154.44 billion) in long-term liquidity.
In an article on the Sina Finance portal, Sheng Songcheng, former head of the statistics department of the People’s Bank of China (PBOC), argued that the cut “may reserve policy room for future moves in the Fed’s monetary policy.”
“The Fed’s pullback of stimulus programs will compress China-US spreads, reversing fund flows and forcing hot money to flow out of China,” Sheng added.
“The RRR drop may push (Chinese) rates lower to a degree, slowing inflows of hot money, allowing for future monetary policy adjustments, and lessening potential depreciation pressure on the yuan,” he added.
Sheng stated that China’s economic recovery was still weak and unbalanced, citing pressure on small and medium-sized banks as well as problems associated with local government debt.
Sheng stated, “Injecting liquidity into markets is beneficial for preventing financial hazards.”
(Andrew Galbraith contributed reporting, and Christopher Cushing edited the piece.)
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