China Seen Cutting Banks’ Reserve Ratio In August To Add Cash

The People’s Bank of China. (Source: Bloomberg)

(Bloomberg) -- China's central bank may cut the reserve-requirement ratio for major banks as soon as this month in an effort to boost lending and revive momentum for the economic recovery.

That's according to several analysts who've pointed to the mounting value of policy loans maturing this month and through the rest of the year as reason for the People's Bank of China to unleash more liquidity.

“There is a large liquidity gap in August,” wrote Ming Ming, chief economist at Citic Securities Co. in a note this week. “Under such environment the possibility of an RRR cut cannot be ruled out,” Ming said, referring to the reserve-requirement ratio, or the amount of cash lenders have to keep in reserve.

Policy loans worth some 400 billion yuan ($55.6 billion) are set to mature on August 15 — the highest amount since January. When those loans mature, the nation's lenders will need to repay the PBOC, leaving them with less cash unless the central bank takes action to add liquidity to the interbank market.

While rolling over maturing loans can free up liquidity, so can cutting the reserve ratio — a step that's advantageous as it unleashes a lot of liquidity at once at a cheaper cost for banks.

Through the rest of 2023, a total of 2.65 trillion yuan worth of the central bank's one-year medium-term lending facilities will come due. That's significantly more than the 1.75 trillion yuan that matured in the first seven months, according to Bloomberg calculations.

Analysts from HSBC Holdings Plc and Minsheng Securities also foresee an RRR reduction this month. An additional injection of liquidity would coincide with efforts by regulators to urge local governments to speed up the sale of bonds to fund infrastructure spending as part of a larger pro-growth push.

The central bank this week also encouraged lenders to cut mortgage rates to revive the struggling property market, noted Jingyang Chen, Asia FX strategist at HSBC. She added that another round of monetary easing could add pressure on the yuan, which has declined 4% this year to become the second worst performer in Asia after the yen.

The dovish tone signaled last week by the ruling Communist Party's Politburo — the top governing body led by President Xi Jinping — has lifted market sentiment in recent days. Though the outlook remains fragile, with the impact of recent announcements of support yet to be realized and fresh data this week pointing to slumping manufacturing activity and home sales.

Central bank officials signaled recently that an RRR cut is on the way at a press briefing and told reporters that a variety of tools will be used to ensure ample liquidity in the banking system.

The central bank last cut the ratio in March, lowering it by 25 basis points for almost all banks.

--With assistance from Yujing Liu.

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