As tipped by Li Keqiang at a State Council meeting earlier this week, China cut the reserve requirement ratio for all banks by 0.5% on Friday.
That takes the rate to the lowest since 2007. Some city commercial banks will see their RRR rate cut by a full percentage point. The moves will be implemented in steps, with the broad cut coming on September 16 and the targeted measures on October 15 and November 15.
Friday’s RRR cut will free up roughly 900 billion yuan in liquidity, the PBoC said. 800 billion yuan will be released by the broad RRR cut, and another 100 billion yuan from the targeted reduction.
“While it is not clear if this is more the result of considerations about perception, as the RRR is often seen as a blunt loosening tool or about financial stability (some believe too low of a RRR level can be bad for financial stability – though this is debatable), there appears to have been some reluctance to use broad based RRR cuts after the first cut in January”, Goldman wrote earlier this week.
Clearly, China has decided that the time for headline easing is now, as trade frictions continue to weigh on the economy. “The RRR cut will be a hedge against the tax period in mid-September”, the PBoC said on its website, being careful to insist that this doesn’t amount to a “flooding” of the system with liquidity. The bank’s commitment to stable monetary policy “has not changed”, the PBoC said.
“A RRR cut is likely needed for the boost on liquidity levels and its signaling impact [and] policymakers seem to have less reservation in RRR cuts than interest rate cuts during the current easing cycle”, BofA said Thursday, cautioning that “RRR cuts cannot be used to substitute for interest rate cuts or other quantitative measures to promote credit creation [because] past experience suggests RRR cuts tend to lower the short-term funding costs, but have limits in influencing long-term borrowing costs and promoting credit demand”.
Irrespective of how effective this incremental step is, it will likely rankle Donald Trump, who is particularly sensitive to easing by foreign central banks, and will doubtlessly mention today’s RRR cut at some point.
Make no mistake, today’s move likely isn’t the end of headline easing in China. Indeed, it’s likely Beijing cuts the MLF rate at some point this month, which would then feed through to the LPR print on the 20th, two days after the Fed meeting.
“The time for the PBOC to cut [MLF and LPR] would likely be just ahead of the Fed meeting”, Goldman said Wednesday, adding that “we do not think a Fed cut will be an obstacle for the PBOC given the strong signal [from the State Council meeting] and given the market appears to be pricing in 2 Fed cuts, in September and October, so the chance of a no-Fed cut at all in the next 2 months, appears very low”.
BofA agrees that benchmark cuts are coming. “In response to the State Council’s demand to lower real interest rates, the PBoC still has to cut both LPR rates (by cutting MLF rates) and benchmark deposit and lending rates”.
In other words, you can call today’s move largely symbolic if you like. But just note that more is almost surely coming.