THURSDAY, March 28, 2024
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Experts weigh in on China's central bank move to cut reserve requirement

Experts weigh in on China's central bank move to cut reserve requirement

The People's Bank of China (PBOC), China's central bank, decided on Wednesday to cut the reserve requirement ratio (RRR) for financial institutions by 50 basis points from Jan 6 to spur the real economy.

The move will cut the cash that lenders must hold as reserves, releasing about 800 billion yuan ($114.6 billion) of long-term liquidity to bolster the economy and reduce social financing costs.

Let's take a look what experts say about it.

Lyu Suiqi, professor at the School of Economics Peking University

The move marks the central bank's policy direction in countercyclical adjustment. As a measure to keep employment, the financial sector, foreign trade, foreign and domestic investments, and expectations stable, it highlights the confidence and ability of the Chinese government.

The RRR cut can keep market liquidity at a reasonably ample level and further optimize liquidity structure. In terms of the direction of monetary policy, Lyu said the central bank will stick to prudent monetary policy, and avoid a flood-like stimulus.

Zeng Gang, deputy director-general of the National Institution for Finance and Development

The medium- and long-term capital brought by the RRR cut, on the one hand, could reduce banks' cost of debt, encourage them to put more funds in capital with higher yield, and correspondingly reduce the cost of capital. On the other hand, long-term funds could, to some extent, promote banks' medium- and long-term loan growth.

More than 120 billion yuan in long-term funds is expected to be unlocked for small and medium-sized lenders, which will build up their capacity to support the targeted enterprises, said the central bank. Zeng said the country is increasing support for small, micro and private businesses, optimizing their supply structure to ensure supply and demand is matched.

Li Qilin, chief analyst at Yuekai Securities

Presently, it's not obvious to see lending rates move downward, due in part to the higher cost of debt, which leads to banks being unwilling to cut their lending rates.

The RRR cut is equivalent to providing low-cost debt for banks. It plays an important role in reducing the cost of capital, and then reduces the financing cost of the real economy. Furthermore, it could dredge up monetary policy transmission channels, motivate the vitality of market players, and further make sure the market forces will play a decisive role in the allocation of resources.

Wen Bin, chief analyst at China Minsheng Bank

The move was in line with market expectations as the maturity of 600 billion yuan of reverse repos in January, coupled with tax payments and higher cash demand during the Spring Festival, will put strains on liquidity.

Wen expected the reduction to lead to lower pricing of the new loan prime rate (LPR) to be announced later this month, with the one-year LPR at 4.1 percent and the above-five-year LPR at 4.75 percent. Noting the move will shore up market confidence, Wen said there is still room for further RRR cuts.

Lou Feipeng, senior economist at Postal Savings Bank of China

The first reserve ratio cut in 2020 aims to reduce social financing costs by providing capital for the early issuance of local government bonds that will strengthen infrastructure construction. As the cut was made at the start of the year, commercial banks are able to lend more to companies and receive profits earlier.

"The reserve ratio cut is a countercyclical measure to stabilize growth and a reflection of the flexibility of monetary policy," Lou said.

Ming Ming, vice-director of CITIC Securities Institute

Considering this year's Spring Festival comes earlier than usual, market liquidity is coming under pressure with higher cash demand. The reserve ratio cut could create a stable capital interest rate and embody the flexibility of prudent monetary policy, Ming said.

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