Yi Gang, deputy governor of the People’s Bank of China, speaks during the 2017 International Finance and Infrastructure Cooperation Forum in New York, U.S. (Photographer: Misha Friedman/Bloomberg)

China Has Less Room for Reserve Ratio Cuts, PBOC's Yi Says

(Bloomberg) -- China still has some room to cut the amount of money banks must hold in reserve, but it’s much smaller than in previous years, the People’s Bank of China Governor Yi Gang said.

“At China’s current stage of development, a certain level of reserve-requirement ratios is necessary and appropriate,” Yi said at a press conference during the National People’s Congress in Beijing Sunday, without specifying what that level is.

Yi reaffirmed the central bank will keep credit growth this year basically in line with the pace of nominal gross domestic product, and promised to work to better support small firms, in line with the commitments made by Premier Li Keqiang in his work report last week.

He also said monetary policy in 2019 should "reflect counter-cyclical adjustments" and strike a balance between tightening and easing while considering external factors.

Here are the details of what Yi said on monetary policy:

On Required Reserve Ratios

  • China’s overall level of reserve ratio is “basically the same” as developed nations
    • That includes the weighted average reserve ratio for all banks, which is 11 percent, and the excess reserve ratio, which is around 1 percent
  • The PBOC needs to take into account how to best allocate assets and prevent risks when considering further RRR cuts
  • The PBOC is in the process of simplifying the reserve ratio framework to make it clearer and more transparent
  • The PBOC will aim to gradually form this into a three-bracket system that differentiates between large, medium-sized and small banks (including rural lenders)

On Interest Rates

  • Small and private firms have to pay higher interest rates because they are perceived as being riskier borrowers, and that risk premium is the main reason they have difficulty getting financing. Working to reduce that will be a major part of the PBOC’s efforts this year
  • Small and private firms have higher incidences of non-performing loans, Yi said, referencing a PBOC investigation in 2018 which showed that about 6 percent of these loans were non-performing.
  • Market-oriented reform of interest rates is required to lower risk premiums, as it helps increase competition and allow the markets to more accurately price in risks
  • Supply-side reform which includes more transparency, improvements to the bankruptcy system and law enforcement, is another way to lower risk premiums

Debt and Credit

  • China faces new situations both domestically and externally:
    • There has been progress in the trade talks, while the outlook for the U.S. Federal Reserve raising interest rates has significantly weakened
    • Market expectations for financial regulation and local government debt management have stabilized
  • At 249.4 percent, China’s overall debt ratio at the end of 2018 was 1.5 percentage points lower than in 2017
  • The sliding trend in aggregate financing has stopped, laying the basis for economic development this year

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