After China’s Surprise Bank Reserve Ratio Cut, Analysts Look for More Support Signs

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The People’s Bank of China’s surprise cut in lenders’ reserve required ratio has analysts speculating on what further steps are coming to bolster the economy as the recovery gradually slows.

Most economists don’t see Friday’s move as the start of a new easing cycle or a signal that further monetary stimulus is on the cards. Rather, the market is now turning its attention to liquidity operations, bond sales and fiscal spending to try and work out how authorities will manage the economy for the rest of the year.

“I don’t think the PBOC’s attitude towards the monetary policy has changed -- it’s still cautious and this is not the start of an easing cycle,” said Morgan Lau, a fixed-income portfolio manager at Fidelity International in Hong Kong. “The primary motivation for China is to support small and medium companies influenced by the spike in inflation.”

The RRR cut frees up about 1 trillion yuan ($154 billion) of liquidity by reducing the amount of money banks have to keep in reserve. The purpose was to support interbank liquidity and capital markets but the overall policy stance hasn’t changed, the PBOC explained in its statement Friday.

Here’s a look at what economists and market analysts are focusing on after the RRR cut:

Market Liquidity

The next chance for investors to get more details on the PBOC’s policy stance is Thursday, when the central bank decides whether to roll over 400 billion yuan in medium-term loans which are coming due. According to the PBOC, some of the 1 trillion yuan in extra money from the RRR cut will be used to repay the maturing loans. The amount of loans allowed to mature or be rolled over will indicate how much extra liquidity the PBOC thinks financial markets need.

The PBOC ramped up lending from this program in the second half of last year, and 4.15 trillion yuan of these loans are due between now and the end of the year.

“This RRR cut could help increase liquidity for banks and lower market rates and actual funding cost,” UBS AG’s Nina Zhang and Wang Tao wrote in a note. “We also believe monetary policy will continue its normalization path, including a further slowdown of credit growth and tighter prudential regulations.”

Fiscal Policy

Banks may need extra liquidity in the second half of this year if they are to purchase the government bonds expected to hit the market during that period. The sale of government debt in the first half of 2021 has been slower than last year, and that pace will need to pick up if the government is to sell all the 4.5 trillion yuan in government debt in the annual plan.

“The PBOC will rely more on its lending facilities such as the MLF, relending and rediscounting to provide long-term liquidity if necessary, to cope with the incoming increase in government bond issuance,” Lu Ting, chief China economist at Nomura Holdings Inc., wrote in a note.

The government is expected to accelerate both fiscal spending and sales of local authorities’ debt in the rest of 2021 to fund infrastructure investment, Shanghai Securities News reported Monday, citing analysts.

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With assistance from Bloomberg