New PBOC chief kicks off reign with 'very clever' reserves move

[BEIJING] Technocrat Yi Gang fended off heavyweight political contenders to become China's first new central bank governor in 15 years. On Tuesday, he showed why.

In his first major policy move since replacing Zhou Xiaochuan last month, Mr Yi oversaw a one percentage point cut in the reserve requirement for most banks.

It was an innovative move that nailed multiple objectives - even if the People's bank of China (PBOC) surprised everyone by announcing the decision without warning after office hours. Funding costs were lowered for small banks feeling the brunt of President Xi Jinping's push to curb debt risk and more credit was freed up for efficient small businesses struggling to access bank loans.

And by making it easier for small banks to lend, a squeeze on shadow banks also was maintained. Capping it all, policy aims were met with a net liquidity injection of just 400 billion yuan (S$83.4 billion), nullifying fears of a sharp shift in monetary policy.

"The risk is always that the market would interpret a reserve-ratio cut as an easing signal," said Larry Hu, head of China economics at Macquarie Securities Ltd in Hong Kong.

"They know the risk of being misinterpreted, but still decided to move forward. Yesterday's move suggests the new PBOC leaders have the guts to do the right thing."

Societe Generale SA said "the design is really very clever", OCBC called the action "innovative" and Mizuho Securities Asia Ltd deemed it "a smart move". "This shows that Mr Yi is a very skilled and seasoned central banker," said Mizuho's Hong-Kong based chief Asia economist Shen Jianguang.

The move will release about 1.3 trillion yuan in liquidity with 900 billion yuan of that used to repay money banks borrowed from the central bank under its medium-term lending facility, the PBOC said. By replacing cash from the MLF with funds locked up in required reserves, banks will save about 80 billion yuan in financing costs, Mr Shen estimates.

Because it unfreezes liquidity for smaller banks that don't have direct access to MLF funds, it may better support the borrowing needs of small and medium-size enterprises, said Tommy Xie, an economist at OCBC in Singapore.

Mr Yi boasts more than two decades of experience at the central bank and was Mr Zhou's No 2 for more than a decade before taking the helm. He's the figurehead for monetary policy while banking and insurance regulator Guo Shuqing serves as party secretary and deputy governor.

Mr Yi won the post over higher-profile candidates that analysts say included Jiang Chaoliang, the Communist Party secretary for Hubei province.

"Yi Gang has quickly stepped up and firmly gripped the policy wheel," said Frederic Neumann, co-head of Asian economics research at HSBC Holdings in Hong Kong.

"It's a subtle adjustment of the PBOC's policy stance, easing funding costs for banks while only expanding liquidity at the margin."

BLOOMBERG