CHINA’S central bank said yesterday that it will reduce the amount of cash that most commercial banks must hold as reserves, but will require them to use that freed-up liquidity to pay back loans obtained via its medium-term lending facility.
Whatever funds the banks have left, after paying back their MLF loans, they should use to provide loans to small companies, the People’s Bank of China said in a statement.
The PBOC’s unexpected decision to cut reserve requirement ratios came after official data earlier yesterday showed China’s economy grew a faster-than-expected 6.8 percent in the first quarter.
RRRs — currently at 17 percent for large institutions and 15 percent for smaller banks — will be cut by 100 basis points, the PBOC said.
The cut will be made on April 25 and will apply to most banks, with the exception of policy lenders such as China Development Bank.
On that day, banks with MLF loans that have not reached maturity are to use the liquidity released by the RRR cut to repay borrowed MLF funds to the PBOC.
The amount of cash freed up by the RRR cut will be slightly higher than the amount of MLF loans to be repaid, according to the PBOC.
Based on first-quarter data, the MLF loans due to be repaid on the day will be about 900 billion yuan (US$143 billion). There will be 400 billion yuan in excess of funds released, and most of that cash will go to city-based commercial banks and rural commercial banks, the PBOC said.
The PBOC said it would maintain a prudent and neutral monetary policy.
The PBOC’s last RRR adjustment was on January 25 when most banks saw at least a 50 bps cut to their RRRs as long as the lenders granted more loans to smaller firms and rural communities.
That adjustment was flagged months in advance in late September.
In a Reuters poll this month, the PBOC was forecast to cut RRRs for all banks by only 50 bps in the fourth quarter of 2018. Analysts had expected two extra 25 bps cuts to follow, bringing the rate down to 16 percent.
Despite the economy’s solid first-quarter performance, analysts still expect it to lose momentum in coming quarters as authorities force local governments to scale back infrastructure projects to contain their debt and as property sales cool due to strict controls on purchases to fight speculation.
A full-blown trade war with the United States could also impact billions of dollars in trade.
Net exports overall were already a drag on growth in the first quarter after giving an added boost to the economy last year, highlighting the need for sustained strength in domestic demand if significant new US tariffs are imposed.
“Rising Sino-US trade tensions are clouding the outlook for China’s exports,” said Xu Gao, a Beijing-based economist at Everbright Securities.
“China needs domestic demand to hold up in the face of increasing uncertainties in external demand, so it needs the micro-management of monetary policies to make sure the real economy is stable.”
The PBOC said it required financial institutions to mainly use newly released funds from the reserve cut to provide loans to small and micro companies and to lower funding costs for lenders, and that this would be included as a requirement in its quarterly Macro-Prudential Assessment for banks.
The PBOC said it still needed to maintain relatively high RRRs for banks to fend off financial risks.
But the liquidity freed by the RRR cut is expected to reduce the cost of funds for banks so that they can step up lending to support the economy.
The interest rate that the PBOC pays banks for depositing their reserves at the central bank is 1.62 percent, but the interest rate the lenders pay for MLF loans from the PBOC is 3.3 percent.
“I think it shows a clear trend of policy relaxation because the interest rate of this year’s MLF is 3.3 percent, but the banks are only receiving 1.62 percent for their reserves at the central bank,” said Zhou Hao, senior emerging markets economist at Commerzbank.
“This has greatly reduced the debt costs of banks. So under the context of deleveraging, the policy mix has become low interest rate-plus-strengthened supervision.”
Banks included in the cut include large commercial banks, joint-stock commercial banks, city commercial banks, non-county-level rural commercial banks and foreign banks.
Yang Yewei, analyst at Southwest Securities, said while it was the first time the PBOC was cutting RRRs to get banks to pay back MLF loans, it may not be the last.
“Since increasing funding for small firms has been included in the MPA assessment, and considering that the MPA assessment is quarterly, we suspect such measures may be implemented quarterly,” Yang said.