The PBOC announced on 1 January a 50bp cut in the Reserve Requirement Ratio (RRR), effective from 6 January. This should release liquidity worth more than RMB800bn (USD115bn, c.0.8% of GDP). According to the PBOC, roughly RMB120bn will go to small and medium-sized banks. We think the reasons for this policy move are threefold. First, the PBOC often provides a boost in liquidity ahead of holiday periods, when demand for cash surges. The Chinese New Year national holidays are upcoming (24-30 January). Second, sales of local government special bonds (for infrastructure projects) restarted on 2 January, also justifying an increase in liquidity needs. Third, downside economic risks continue to outweigh upside ones. Looking forward, we expect continued monetary easing this year, with 100bp more of cuts in the RRR, and a lowering of 30bp in the Loan Prime Rate. Along with the reform announced in late-December switching the interest rate regime of outstanding loans, these measures should in particular help ease credit conditions for the private sector and small firms.
Authors
Françoise Huang
