PBOC Signals Reserve Ratio Cut to Boost Rural Finance
China’s central bank signaled it may reduce the reserve requirement ratio for banks to spur rural finance, a targeted move that would help cushion the economy as it slows.
The People’s Bank of China said it will use monetary policy tools including the reserve ratio, and relending and rediscounting measures for rural development, according to a statement Thursday. That fueled speculation of a targeted RRR cut, possibly as soon as Friday.
PBOC Governor Yi Gang earlier this week pledged to boost credit support to the economy and improve efforts to bring down real lending rates for businesses. In a front-page commentary in the China Securities Journal Friday, analysts said there could be an increase to credit supply soon and another reduction in the RRR following July’s surprise cut.
Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore, said the PBOC’s comments have fueled speculation of a RRR cut as early as Friday. Lu Ting, chief China economist at Nomura Holdings Inc., sees more than 70% chance of a RRR cut in the next two months.
“With the rising risk of a growth slowdown and the lack of flexibility in some key existing tightening measures, we believe the probability of a RRR cut is on the rise in the near term,” Lu said in a note Friday.
The PBOC has in the past cut the required reserve ratio for rural banks to encourage lending to the agricultural industry and small businesses. The last time it did so was in April 2020, when it lowered the RRR by 1 percentage point for rural financial institutions and regional commercial banks, unleashing 400 billion yuan ($61.7 billion) in liquidity.
Lu said any cut in the RRR will likely be targeted that injects less than 500 billion yuan of liquidity, given the effective RRR for small banks is already quite low at 5.5%.
China’s 10-year sovereign bond yields dropped as much 3 basis points to 2.86% following the PBOC statement Thursday, and rebounded to 2.87% as of 10:09 a.m. Beijing time on Friday.
Separately, the Ministry of Finance said in a statement Friday it will accelerate fiscal spending and moderately speed up local government bond sales, providing additional support to the economy in the second half of the year.
The monetary and fiscal push comes amid signs of slowing growth given a series of regulatory crackdowns across industries, fresh virus outbreaks and supply constraints. A set of high-frequency indicators tracked by Bloomberg showed the economy’s rebound leveling off in August.
The central bank said it will boost the role of financing guarantees provided by the government, and use big data to build an information system that helps the rural area with financing. It will maintain stable financial support to continue to help regions that have just eradicated poverty, and focus on grains and major farm products supply as well as new agriculture business entities.
The PBOC’s statement followed a meeting with ministries of finance and agriculture and several other government institutions, where they discussed ways to boost financial support for rural areas.
On Tuesday, state broadcaster CCTV cited PBOC Deputy Governor Pan Gongsheng as saying the central bank will “continue to implement” a preferential RRR for financial institutions located and doing business in counties.
Qu Qing, chief economist at Jianghai Securities Co. Ltd., said Pan’s wording indicates the PBOC intends to maintain the favorable RRR for rural banks, instead of cutting it again. Market expectations for a reduction in the ratio were overblown, he said in a note Friday.
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