China hints at more easing with possible reserve ratio cut

SHANGHAI – China’s central bank has signalled that it is prepared to keep policy loose by lowering the amount of money banks must keep in reserve, reinforcing expectations among investors of more easing to come.

The People’s Bank of China (PBOC) will use a variety of tools to provide “strong support” for a reasonable growth in credit, said Mr Zou Lan, head of the central bank’s monetary policy department, in an interview with Xinhua News Agency on Jan 9.

He highlighted “reserve requirements” as one option, suggesting policymakers have considered trims to that ratio as a way to boost lending capacity and bolster credit.

The central bank will also strengthen its counter-cyclical and cross-cycle policy adjustments to create favourable financial conditions for the country’s economic growth, Mr Zou told the newspaper.

He added that the PBOC will guide financial institutions to strengthen their liquidity risk management for stable money market operations.

Investors and analysts have been betting on loose monetary policy in 2024 as the Chinese economy continues to show signs of weakness and confidence has yet to rebound.

Mr Zou’s remarks do not necessarily signal an imminent cut to the so-called reserve requirement ratio or RRR – though they may suggest such action is on the table in the coming months.

He made similar public comments in July 2023 before the central bank reduced the RRR for major banks in September.

Even so, there are signs the environment is ripe for further easing.

Chinese government bond yields are at the lowest in nearly four years, while banks have been able to raise short-term debt more cheaply in money markets than from the central bank.

The PBOC has also been softening its grip on the renminbi, while major commercial lenders just recently reduced their deposit rates.

Any action in the near term would come on the heels of an already-aggressive series of moves by policymakers to pump more cash into the banking system.

In December, the central bank doled out an unprecedented 800 billion yuan (S$149.6 billion) of one-year loans to commercial lenders, and injected even more short-term cash through open market operations.

The combined effect was equivalent to at least a 50 basis point reserve ratio cut that is set to bring the central bank’s balance sheet to another record.

In addition, the PBOC also provided nearly US$50 billion (S$66.5 billion) worth of low-cost funds to policy-oriented banks to finance housing and infrastructure projects in December.

Markets are clamouring for some kind of action from the Chinese authorities that may inject more momentum into the recovery.

The CSI 300 Index – a benchmark of onshore Chinese shares – was up 0.4 per cent mid-morning on Jan 9, trailing the advance in a broader gauge of Asian equities.

It slumped to the lowest in nearly five years during the previous session as concerns about the economy and policy uncertainty persist.

The renminbi has advanced nearly 3 per cent against the US dollar after hitting the weakest level since 2007 in September, opening up the room for the PBOC to ease policy without triggering significant capital outflows.

China’s 10-year government yield inched towards the lowest level in more than two decades.

Some analysts cautioned that an RRR cut will likely not be enough on its own to spark a meaningful turnaround.

“This is a low-hanging reflex – not an adequate, much less resounding, resolution to China’s deep-seated confidence deficit,” wrote Mr Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore, in a research note about a potential RRR reduction.

“Merely increasing the capacity for credit supply, which RRR cuts will do, will not guarantee a restoration of unimpeded cash flow,” Mr Varathan wrote.

He cited the close relationships between China’s real estate and shadow banking industries, along with debt woes among local governments, as issues that “cannot simply be waved off with RRR cuts”.

Case in point: The failure of shadow banking giant Zhongzhi Enterprise Group, which last week filed for bankruptcy.

Pinpoint Asset Management chief economist Zhang Zhiwei said: “Monetary policy easing is helpful on the margin, but fiscal policy easing would be more effective.”

The Chinese authorities have pledged to strengthen fiscal support for the economy via measures such as more government spending in 2024, as Beijing is expected to set an ambitious growth target for the year of around 5 per cent or so.

Fiscal stimulus was weak in 2023 as the authorities struggled to pull revenue from selling land, a consequence of the property crisis. BLOOMBERG