China Initiating Bold Pro-growth Measures
China’s latest cut in its RRR (reserve requirement ratio) indiates more bold pro-growth measures on the horizon against rising economic headwinds.
The People’s Bank of China (PBOC) announced Monday it will reduce the RRR for banks by 0.5 percentage points, the 1st such operation since October.
Specifically, the RRR will be 17% for large banks and 15% for smaller ones.
The decision surprised the market as the PBOC has conducted open market operations and lending facilities more frequently, rather than RRR or interest rate cuts, to pump cash into the market in recent months for fear of further slips by the RMB Yuan.
Central bank governor Zhou Xiaochuan disclosed a fine-tuning of China’s policy stance, shifting from a “prudent” monetary policy to one that is “prudent with a slight easing bias” during a G20 meeting concluded Saturday in Shanghai.
The central parity rate of the RMB Yuan strengthened 67 basis bpts to 6.5385 Vs USD Tuesday.
The cut aims to ensure ample liquidity on the market and create a favorable environment for structural reform, according to a statement released by the central bank.
China’s Yuan funds outstanding for foreign exchange dropped RMB 644.5-B (US$ 100-B) in January following an even deeper dive in December due to depreciation expectations for the RMB Yuan, China’s currency.
Analysts believe the RRR cut suggested that economic regulators will continue to prop up growth by rolling out easing measures amid economic overhauls.
Easing policies should continue as supply-side reforms cannot take effect quickly, Such decisive actions by the government can soothe market jitters and boost confidence in the real economy.
The central bank pared the RRR and rates many times to drive down corporate borrowing costs and stimulate the real economy since the end of Y 2014.
Weighed by falling exports and industrial overcapacity, China is grappling with a lingering slowdown. Manufacturing activity fell to its lowest level in four years last month, calling for more policy support and efforts on structural reforms.
Economists agreed the RRR cut will be followed by more growth-supportive policies this year.
Wang expects the PBOC to cut the RRR by a total of 300 bpts and continue to lower benchmark interest rates. Lian Ping, chief economist with the Bank of Communications, predicts at most three RRR cuts but held that rate cuts will be less likely.
Finance Minister Lou Jiwei has predicted an increase in the budget deficit this year and said China still has room to expand fiscal policy.
China raised its budget deficit to 2.3% GDP in 2015, up from 2.1% in Y 2014, the line is at 3.0%
Monday, when meeting with US Treasury Secretary Jacob Lew in Beijing, Premier Li Keqiang said China will be more forceful in proactive fiscal policy and will continue structural reform, especially on the supply side, to foster new growth drivers and revitalize traditional drivers.
Stay tuned…
HeffX-LTN
Paul Ebeling
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