China reserve ratio cut coming?

They are already behind the curve. The question shouldn't be whether there will be a cut, but how large? The economy needs a shock here, if monetary policy is to work. (Not that generating inflation here wouldn't create a whole separate set of problems.)

If they cut this weekend though, it will spook the market. They will likely time a big cut with the release of bad data.

Will China Cut Reserve Ratios This Week?
The China Banking Association wrote in a front-page editorial in the China Securities Journal on Tuesday that the central bank needs to cut the banks' RRR, currently at 20 percent, to ease a short-term liquidity crunch.

The PBoC pumped about 143 billion yuan ($22.53 billion) into the banking system on Tuesday following a 125 billion yuan injection via two reserve repo offerings the previous week. The last time it injected liquidity into the market in May, it was followed by a cut in the banks' reserve requirements, triggering talk that this time around as well the central bank may follow up with a cut.

Bank lending was also weak in June. China's 'Big Four' banks issued 180 billion yuan ($28.3 billion) worth of new loans, the Shanghai Securities Journal reported on Tuesday, down about 28 percent from the 250 billion yuan in new loans the four banks issued in May.

Update: Within about an hour of posting this, China cut rates 0.31% for 1-year money (6.31% to 6%) and cut the reserve requirement by 0.25%. Deposit rates were cut from 3.25% to 3%. The minimum interest rate was also reduced to 70% (which means a bank could make a 1-year loan at 4.2%). In the previous month, that was cut from 90% to 80%.

These moves shore up liquidity and could ease the credit crunch, but it will not do anything to turn the economy around.

No comments:

Post a Comment