China: One more targeted RRR cut in 2018 – Nomura

The People’s Bank of China (PBoC) announced yesterday that from 25 April it is cutting the reserve requirement ratio (RRR) by 100bp for large commercial banks, jointstock commercial banks, city commercial banks, rural commercial banks and foreign banks, notes the research team at Nomura.

Key Quotes

“Unlike the one that came into effect this January, this time these banks are required to repay funds borrowed from the PBoC under the medium-term lending facility (MLF) in due course on 25 April. The replacement of the MLF with the RRR cut could provide the economy with more long-term stable funding. A lower RRR should also increase the efficiency of interest rate transmission in China, which echoes PBoC Governor Yi Gang’s call for gradual interest rate liberalisation, to transform the current dual-track interest rate system into a united one.”

“According to the PBoC's estimate, the gross liquidity injection from the cut will be ~RMB1.3trn, with RMB900bn being used to repay the MLF borrowing and the remaining RMB400bn forming a net liquidity injection. Given the deposit base at around RMB170trn, it suggests that this targeted RRR is on a quite broad basis.”

“After this targeted RRR cut comes into effect on 25 April, we maintain our call for a 50bp RRR cut in H2 as China’s money supply is experiencing a regime change from one driven by the monetary base to one being more reliant on growth of the money multiplier. Again, we view the aim of that RRR cut being to maintain stable liquidity conditions without expanding the PBoC’s balance sheet too rapidly, rather than a move towards monetary policy easing.”

“In addition, we expect the PBoC to maintain its neutral monetary policy stance through this year, and believe financial deleveraging may remain a multi-year theme for China.”