PBOC adds $56b to Chinese banks to shore up lending

Bloomberg

The People’s Bank of China (PBOC) cut the amount of cash that some banks have to put aside as reserves, injecting liquidity to encourage lending as the world’s second-largest economy is set for the slowest growth since 1976.
The required reserve ratio (RRR) for rural banks and small city commercial banks will be lowered 1 percentage point, the PBOC said on its website. The move will release $56 billion of liquidity, the PBOC said, with half the cut taking effect on April 15 and the rest on May 15.
A cut in the reserve ratio is a continuation of the PBOC’s relatively modest approach to easing, compared with some global counterparts who have pledged purchases of securities and direct lending to the private sector. Economic activity in China is almost certain to contract deeply in the first quarter as the government shut down the nation to try and stop the spread of the coronavirus.
“The cut is aiming to support small banks whose asset quality has been affected by the coronavirus,” said Xing Zhaopeng, a market economist at Australia and New Zealand Banking Group in Shanghai, adding that he expected the one-year loan prime rate to drop by 20 basis points in April after the move. “The second quarter will see more liquidity injection and regulatory adjustment to encourage banks to give more loans to small and medium-sized firms.”
The required reserve ratio will be lowered to “a relatively low level” of 6% for over 4,000 medium and small-sized financial institutions after the cut, the PBOC said, and on average they’ll each have an extra 100 million yuan of long-term liquidity. Lowering RRR for smaller banks can support them to be more focused on lending to smaller companies by increasing the liquidity supply and reduce financing costs, PBOC Deputy Governor Liu Guoqiang said.
The PBOC also cut the interest rate it pays on banks’ excess reserves at the central bank to 0.35% from 0.72% from April 7. Cutting that rate will effectively push down the bottom of the interest rate corridor and thus lower interbank rates.
Chinese policy makers have signalled more stimulus is in the pipeline, including a higher fiscal deficit and the sale of off-balance-sheet debt for central and local governments. With fiscal easing about to ramp up, a more accommodative monetary policy is necessary to push down the overall borrowing cost and make bond issuance easier.
A reserve-ratio cut, while not immediately lowering the cost of borrowing in China, is a rapid way of freeing up cheap funds to lend and has been a favoured tool in the central bank’s efforts to control the economic slowdown in recent years. The central bank made clear that it’s not immediately looking to cut the benchmark interest rate on
deposits as a stimulus tool. A cut to that would have reduced pressure on bank profits.
“I doubt the effectiveness — it’s obvious that the PBOC wants to release liquidity but doesn’t want to release too much,” said Iris Pang at ING Bank NV in Hong Kong. The RRR cut “will be useful only if all of it goes to SMEs that have a real need – i.e. a weak credit profile. Will banks take this risk now?”