PBC cut RRR to spur growth

Business: B2

China’s central bank cut the amount of cash that commercial banks must hold at the central bank to spur economic growth amid escalating trade war between China and the US while insisting on a prudent and moderate monetary policy.

The People’s Bank of China (PBC) said on Sunday that it would cut the reserve requirement ratio (RRR) by 100 basis points (bp) starting from October 15, unleashing about 750 billion yuan ($109.2 billion) into the market.

Its latest move partly aims at repaying medium-term lending facilities (MLF) of 450 billion yuan, which are due on October 15. Apart from that, the cut is also expected to inject about 750 billion yuan into the market, according to a statement on its website.

This is the fourth RRR cut since the beginning of this year. As the central bank cut 100 bp and 50 bp in April and in June, respectively, it has reduced an accumulated RRR by 250 bp, Zhang Ming, a research fellow at the Chinese Academy of Social Sciences, said in a research note published on his WeChat account on Sunday.

The latest move came out after China’s economic growth has further slowed down, with estimated GDP growth of 6.4 percent in the fourth quarter if no measures are taken to prop up it, Zhang noted.

And as the trade frictions between China and the US continue, export will contribute less to the overall economic growth, and tighter control over China’s real estate sector will also curb investment in the housing market.

The main purpose of the latest RRR cut is to optimize the liquidity structure and enhance the financial support in the real economy. With increased credit extension, the medium-and-long-term liquidity demand of financial institutions is also growing. Reducing RRR will help stabilize funding and liquidity of financial institutions and lower fundraising costs of Chinese enterprises, the central bank statement said.

This RRR cut does not signal the central bank’s shift in its monetary policy from prudent to a relaxed one, as the latest move is relatively neutral, Xie Yaxuan, an expert at China Merchants Securities, said in a research note sent to the Global Times on Sunday.

“Further reducing RRR is the future trend,” he said, noting that the country’s monetary policy is in line with two major targets, namely deleveraging and stabilizing debt ratios.

Meanwhile, the latest move will have limited impact on the Chinese yuan, analysts noted. As the central bank cut RRR for offsetting maturing MLF loans, and its extra injected liquidity has moderate scale, which will not cause a significant fall in interest rates, Lian Ping, chief economist at the Bank of Communications, said in a research note sent to the Global Times.

The latest RRR cut will not lead to the depreciation pressure of the Chinese yuan, the PBC noted.

Chinese stock markets will probably be led by fluctuations after the National Day holidays, mainly pressured by external market decline, a stock analyst predicted on Sunday.

But he said the central bank’s recent decision to cut reserve requirement ratios (RRR), would help stabilize the two bourses.

The Shanghai Composite Index stood at 2,821.35 points, up by 1.06 percent, on September 28, the last trading day before the National Day, while the Shenzhen Component Index reached 8,401 points on that day, up by 0.8 percent.

Li Daxiao, chief economist at Shenzhen-based Yingda Securities, told the Global Times on Sunday that the plunge in external stock markets would restrict the rebounding level of mainland stock markets after the weeklong National Day holidays.

The US stock markets fell during China’s National Day holidays, with the Dow Jones Industrial Average losing about 180 points on Friday, or 0.68 percent, after edging down by 0.75 percent on Thursday, while NASDAQ-listed shares plunged by 3.21 percent at the close on Friday.

“Such falls in overseas markets will exert great pressure on the A-share’s performance in general,” Li said.

But experts stressed that positive news is also accumulating that can help prop up the markets. For example, the recently-announced RRR reduction can help stimulate market confidence.

The People’s Bank of China, China’s central bank, announced on Sunday that it would cut RRR by one percentage point for major commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks as well as overseas-invested banks starting from October 15.

Yang Delong, chief economist at Shenzhen-based First Seafront Fund Management Co, said that A-shares’ values have dropped to a very low level resulting from the two bourses’ year-long plunge, meaning that the A shares have reached a point where they have good investment values.

“Now almost all the negative factors for the A shares have been reflected in the share prices already, so I estimate the markets won’t have much space for a further slump,” Yang told the Global Times on Sunday.

The two bourses, pressured with a downward trend for quite some time, have showed a rebounding trend in late September. The Shanghai market bounced from about 2,700 points on September 18, while the Shenzhen market rebounded from a periodic bottom of 8,133 points, also on September 18.

A Shanghai-based investor surnamed Zhang said that he has felt the “wind of the bullish market” blowing.

“I am not sure exactly when I will dive in, but I guess next year there will be significant positive changes on the A-share markets,” he told the Global Times over the last week.