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Quick take: China cuts reserve ratio by 100bps, injects US$200b of new liquidity

Monday, April 20, 2015 - 09:50
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A fluttering Chinese national flag casts its shadow on the headquarters of the People's Bank of China, China's central bank, in central Beijing. In its latest move to boost growth, China's central bank cut the reserve requirement ratio (RRR) by 100bps in a single move.

In its latest move to boost growth, China's central bank cut the reserve requirement ratio (RRR) by 100bps in a single move.

The People's Bank of China said on its website on Sunday that the lenders' reserve-requirement ratios will be lowered 1 percentage point effective on Monday, the largest since November 2008.

Here are some comments by economists and analysts:

Qu Hongbin, Co-head of Asian Economic Research and Paul Mackel, Head of Asian Currency Research.

"The move was widely expected given last week's weak data releases. However, the magnitude of the cut - the largest since November 2008 - signals Beijing's heightened concerns over the growth slowdown and disinflation."

"Today's cut will likely inject over RMB1.2 trillion of new liquidity into the system and support credit growth. It will also help to anchor short-term interest rate expectations and lower borrowing cost for the real economy."

"However, more easing is still needed to contain disinflation. We expect the PBoC to cut the policy rate by 25bps within Q2. For 2H 2015, we expect another 100bps reserve ratio cut and a 25bps policy rate cut."

"Our FX colleagues expect little negative, if not modestly positive impact on the RMB from this RRR cut. The market will continue to focus on China's push for RMB full convertibility and internationalisation with the SDR inclusion, AIIB, and MSCI the key focal points."

HSBC China Equity Strategists:

"The magnitude of the easing is more aggressive than we had expected. A 100bps RRR cut only happened once during 2008 financial crisis. However, this move is not a total surprise as China's latest macro data surprised on the downside. The move clearly aims at neutralising the negative impact of the CSRC's new rules to restrict margin financing and encourage stock lending (to sell).''

"This further confirms our positive view on the H-share market to buy on dips, if any. HSBC China economists expect the PBoC to cut the policy rate by 25bps within Q2. For 2H2015, they expect another 100bps reserve ratio cut and a 25bps policy rate cut. It's a political goal to create wealth effects in both A- and H-share markets, so that Beijing can utilise the stock market to stimulate innovation and entrepreneurship and channel liquidity to the real economy to hedge economic downside risk, as well as to facilitate SOE deleveraging and further reforms. In the current easing cycle, China's central bank cut RRR on Feb 4, 2015. Based on performance three days after the RRR cut, the financial sector (brokers, insurance, banks and properties) outran most the other sectors..."

Sharon Zollner, a senior economist in Auckland at ANZ Bank New Zealand:

"The reserve-requirement ratio cut was much bigger than the market anticipated, with the aim of forcing banks, awash with liquidity, to lend more to the real economy at a lower interest rate, boosting investment growth and the housing market.''

"Will it work? Yes, it will have an impact, though the impact of a boost when you're on a slide can be hard to spot."

Helen Qiao, Hong Kong-based chief greater China economist at Morgan Stanley:

"The move is positive, showing policy makers are trying to offset the impact of potential capital outflow and stabilize the macro environment.''

Link to official announcement (Chinese): http://www.pbc.gov.cn/publish/goutongjiaoliu/524/2015/20150419165818249314312/20150419165818249314312_.html

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