Even while the Chinese central bank has supplied a flood of cash through other means in recent weeks, officials there have hinted that they may reduce the reserve requirements that banks must meet in order to increase lending.
According to Zou Lan, head of the PBOC's monetary policy department, the central bank could employ measures such as reserve requirements, medium-term lending facilities, and open market operations to offer "strong" backing for reasonable credit growth. This information was relayed by the official Xinhua News Agency.
In an interview released late Monday (Jan 8), Zou said that the central bank will enhance its counter-cyclical and cross-cycle policy adjustments in order to foster financial circumstances that are conducive to the country's economic growth.
Prior to the central bank's reduction of the so-called reserve requirement ratio (RRR) in September, Zou made same remarks in July. Authorities are under pressure to reduce interest rates and supply enough liquidity due to a weak economic recovery, and his comments come as traders are increasing their expectations on more monetary easing this year.
Midway through December, policymakers lent 800 billion yuan (S$152 billion) to commercial lenders in a one-year program, and at the end of the year, they injected even more short-term funds through open market operations. This will cause the central bank's balance sheet to reach new heights, as the combined effect was the same as a reduction of at least 50 basis points in the reserve ratio.
Neo Wang, the managing director for China research at Evercore ISI in New York, stated that "the PBOC still owes the market an RRR cut despite record-high liquidity injection." "Good news is urgently needed by the equity market. We anticipate a 25-basis-point reduction in RRR in the near future; in the upcoming two weeks, the bank may also lower prime and medium-term loan rates.
Declining even more
On Monday, the CSI 300 index closed at a new low, down 1.3% from its February 2019 high. One of the worst-performing major market indexes in the world, the measure has fallen in every trading session this year, losing more than 4%. Technology companies' stock prices were the worst performers as the Hang Seng China Enterprises Index fell over 2% to its lowest level since November 2022.
Yields on Chinese government bonds have dropped to their lowest point in over four years, and money market borrowing of short-term debt is cheaper than borrowing from the central bank. Major commercial lenders have recently lowered their deposit rates, which bodes well for bets on additional policy easing and signs that the PBOC is loosening its grip on the currency.
Bloomberg surveyed economists in December, and their predictions for the first quarter of 2024 included a 25-basis point reduction to the RRR.
Following the September rate cut, the Chinese economy was expected to release more than 500 billion yuan, according to the central bank-backed Financial News. Therefore, RRR cuts will free up long-term liquidity.
According to Zou, the People's Bank of China (PBOC) would guide financial institutions to improve their liquidity risk management in order to maintain stable money market operations, and it will also take steps to avoid the blockage and idling of funds.
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