China’s central bank has announced a reduction in the money that banks have to hold in reserve to support the economy by releasing an estimated 800 billion yuan (US$114.6 billion) into the banking system. The 50 basis point reduction in the Reserve Requirement Ratio (RRR) would “support the development of the real economy and reduce the actual cost of social financing” and would take effect from January 6.
“We believe this signals Beijing’s heightened concerns on economic growth headwinds, credit contraction pressure in some regions, and an upcoming liquidity shortage ahead of and during the lunar new year (LNY) holidays,” Nomura analysts said in a report.
The People’s Bank of China said the RRR cut was made to support cash demand ahead of the Spring Festival and the move was not a reflection of any change in policy. It said there was no intention to flood the banking system with liquidity which would “remain basically stable, flexible and moderate.”
The move comes a day after China reported forecast-beating official manufacturing PMI which was steady at 50.2 in December, staying in expansionary territory for the second consecutive month and on the heels of US President Donald Trump’s tweet that Phase 1 of trade deal with China would be signed on Jan. 15 at the White House.
“High-level representatives of China will be present. At a later date, I will be going to Beijing where talks will begin on Phase Two!” Trump said in his tweet.
“We think the stabilization in the manufacturing PMI reflects the continued recovery of manufacturing confidence due in part to the easing of US-China trade tensions following the announcement that the countries had reached a phase one deal,” Barclays economists said in a note.
Morgan Stanley analysts stated in a report that reduced external uncertainty and still-accommodative policy could induce a modest mini-cycle growth recovery in China, with GDP growth likely to reach 6.0%Y in 1H20 and 6.1%Y in 2H20.
Wednesday’s announcement of the RRR cut was unlikely to bridge the liquidity shortage in the economy completely but it would boost market sentiment.
Nomura analysts estimated the liquidity shortage to be around 2.7 trillion yuan based on holiday demand, maturing targeted medium-term lending facility (TMLF), tax season effects, and the crowding-out effects of local government special bond issuance.
“The PBoC can be expected to add some more medium- to long-term liquidity via MLF (medium-term lending facility), TMLF and pledged supplementary lending (PSL), as well as short-term liquidity via open market operations (OMO), to keep liquidity conditions largely stable in coming months. In light of strong growth headwinds, we expect the PBoC to deliver another 50 bps RRR cut in Q2 2020 when CPI inflation will likely pass the peak,” it said.
Still, there would be limited economic boost from the RRR cut because Chinese policymakers were excluding the property sector, which accounted for a quarter of the nation’s GDP, from easing measures and there was limited room for policy easing.