PBoC cuts reserve ratio


The People’s Bank of China (PBoC) announced before the National Day holiday that it would cut the amount of cash banks have to hold in reserve, on the condition that the banks channeled funds to certain groups of clients. While a cut in required reserve ratio (RRR) is not new, it is the first time the PBoC has put conditions on such easing.

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Under the new policy, the RRR could be lowered for banks that meet requirements for lending to small businesses and the agricultural industry. The scale is large as all big banks and 90% of small- and medium-sized banks are eligible for a cut. The RRR will be cut by 0.5 percentage points starting from 2018 for banks whose loans to the target group account for 1.5% of their outstanding loan or newly added loan amount in the previous year. For banks with the above loan proportion at 10% or more, the RRR will be cut by 1.5 percentage points. It is expected to free up liquidity of RMB 700 billion.

The RRR cut with specified conditions is a new policy which aims at changing the direction of bank loans instead of loosening monetary policy. It will be effective three months after the announcement so banks still have time to boost loans for the target group. The new policy caters to the financing needs of overlooked parties so they have enough capital to develop their businesses.

China’s housing market has always been sought after as the country lacks quality assets and investment opportunities. However, the impact of the new RRR cut policy on housing prices is expected to be minimal as the control measures on housing market are increasingly stringent which strictly rein in investment activities. On the other hand, demand from end users remain strong and the market fundamentals continue to be robust. As such, Vigers Research forecasts that housing prices will persist to increase in the coming six months.

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In fact, the Chinese authorities are still determined to lower bank leverage ratios. The central bank’s latest decision is different from the traditional monetary policy changes of a broad reserve ratio reduction, and hence does not alter their resolution to lower financial risk. Since the new policy focuses on small businesses and the agricultural industry, its impact on the housing market and even the whole economy is expected to be small. The overall housing price is likely to continue to increase amid stable market demands.

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