Cen­tral bank moves to cut lenders’ fund­ing costs

RRR re­duc­tion will in­crease sup­ply of long-term cap­i­tal, sta­bi­lize liq­uid­ity

China Daily - - BUSINESS - By CHEN JIA chen­jia@chi­nadaily.com.cn

China’s cen­tral bank an­nounced a cut in some fi­nan­cial in­sti­tu­tions’ re­served cash amount by 1 per­cent­age point from April 25 to sup­port small and mi­cro en­ter­prises and sta­bi­lize liq­uid­ity in the bank­ing sys­tem, ac­cord­ing to a state­ment on its web­site re­leased on Tues­day.

The move is ex­pected to free about 1.3 tril­lion yuan ($206.99 bil­lion) in to­tal, and 900 bil­lion yuan of that will be used to pay back the funds bor­rowed by com­mer­cial banks via the Medium-term Lend­ing Fa­cil­ity (MLF), an open mar­ket oper­a­tion tool to main­tain liq­uid­ity us­ing se­cu­ri­ties as col­lat­eral, said the Peo­ple’s Bank of China, the cen­tral bank.

Large com­mer­cial banks, joint-stock com­mer­cial banks, some ru­ral com­mer­cial banks and for­eign banks, which have a rel­a­tively higher re­serve re­quire­ment ra­tio (RRR) of 17 or 15 per­cent, are on the list to im­ple­ment the pol­icy from April 25, the state­ment said.

The RRR cut will in­crease the sup­ply of long-term cap­i­tal and re­duce banks’ fund­ing costs, said an anony­mous of­fi­cial from the cen­tral bank.

“The in­creased 400 bil­lion yuan (af­ter the pay­ment of MLF) will en­rich low-cost fund re­sources for small and mi­cro-sized en­ter­prises at the same time.”

The RRR cut will not al­ter the “pru­dent and neu­tral” mone­tary pol­icy tone, and the to­tal liq­uid­ity amount in the bank­ing sys­tem could re­main sta­ble and neu­tral, with a op­ti­mized liq­uid­ity struc­ture more fo­cused on sup­port the real eco­nomic growth, said the PBOC.

The un­ex­pected move is likely to boost China’s bond mar­ket while sta­bi­liz­ing the stock mar­ket, con­sid­er­ing that re­cent Sino-US trade ten­sion may in­crease un­cer­tain­ties in the sec­ond quar­ter’s eco­nomic growth, said Zhang Ming, a re­searcher with the Chi­nese Academy of So­cial Sciences.

The Peo­ple’s Bank of China in­jected 367.5 bil­lion yuan ($58.54 bil­lion) through oneyear MLF op­er­a­tions on Tues- day at an in­ter­est rate of 3.30 per­cent, up from 3.25 per­cent, ac­cord­ing to a state­ment on the PBOC web­site.

One day ear­lier, the cen­tral bank also raised the 14-day re­verse re­pur­chase in­ter­est rate to 2.7 per­cent from 2.65 per­cent, at which rate 150 bil­lion yuan of liq­uid­ity was freed into the in­ter­bank mar­ket.

Those moves fol­lowed a sim­i­lar open mar­ket oper­a­tion in March when the cen­tral bank lifted the seven-day re­verse re­pur­chase in­ter­est rate at auc­tion by 5 ba­sis points, from 2.50 per­cent to 2.55 per­cent, in a quick re­sponse to the US Fed­eral Re­serve’s rate hike.

Economists from fi­nan­cial in­sti­tu­tions fore­see those ef­fec­tive lend­ing rates edg­ing higher in the com­ing months, fol­low­ing the same trend since 2017, adding to fund­ing costs and liq­uid­ity pres­sures.

The CSI 300 in­dex of ma­jor com­pa­nies listed in Shang­hai and Shen­zhen fell 1.58 per­cent on Tues­day, fol­low­ing a 1.6 per­cent drop on Mon­day, led by de­clines among prop­erty com­pa­nies and com­mer­cial banks.

“We fur­ther ex­pect ef­fec­tive in­ter­est rates to edge higher this year,” which may pose a chal­lenge to banks with weak loan pric­ing power or thin cap­i­tal buf­fers, said So­phie Jiang, an an­a­lyst with No­mura Se­cu­ri­ties.

The Tokyo-based se­cu­ri­ties com­pany cal­cu­lated that China’s mar­ket rates had edged 52 to 183 ba­sis points higher to 2.56-5.74 per­cent across the loan and in­ter­bank mar­kets, bonds, money mar­ket funds and wealth man­age­ment prod­ucts since 2016, al­though bench­mark rates re­main un­changed at 1.5 per­cent for one-year de­posits and 4.35 per­cent for one-year loans.

PBOC Gover­nor Yi Gang said last week at the Boao Fo­rum for Asia an­nual con­fer­ence that China’s mone­tary pol­icy is “fully pre­pared”.

“We are well grounded to con­tinue the pru­dent pol­icy. When other coun­tries start mone­tary pol­icy nor­mal­iza­tion, we will stick to our pru­dent ap­proach,” he said.

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