China’s move to lower the reserve requirement ratio for banks is a measure aimed at shoring up growth that’s unlikely to have much impact on the local currency, according to analysts.
(Bloomberg) — China’s move to lower the reserve requirement ratio for banks is a measure aimed at shoring up growth that’s unlikely to have much impact on the local currency, according to analysts.
Market watchers were divided on whether the move was a reaction to the stresses seen in the global banking sector this week but their reaction suggested it was not completely unexpected.
The cut came as a gauge of short-term funding costs soared toward a two-year high, a sign that a liquidity squeeze is emerging in China’s financial markets. The demand for funding has risen of late as banks set aside cash for tax payments and disburse more loans amid an economic recovery.
Here is a selection of comments:
Ken Cheung, Chief Asian FX Strategist at Mizuho Bank
“PBOC unexpectedly cut the RRR by 25 basis points, reflecting the central bank’s easing bias to support the economy. CNY spot softened toward 6.89 level but the historical experience showed that the RRR cut impact on the FX side was rather limited. With the still opposite Fed-PBOC monetary cycle, the CNH and CNY deliverable forward will remain in heavy discount”
Huang Yuhang, fund manager at Lanqern Capital Management Co.
“I don’t think this has much to do with fears about the banking stress, but rather the recovery seems to need a bit of help, judging by the economic figures this week. The key impediment to the recovery is demand still being weak, as confidence for incomes is still fragile, so liquidity hasn’t been the issue for the economic recovery, hence the market may or may not buy it”
Mingze Wu, a FX trader at StoneX Group in Singapore
“Given that global banks are now on defensive and liquidity is at premium, it make sense for PBOC to start getting ready before real problem arise. Likely Chinese banks have been affected by their bond portfolio losses just like the US bank albeit the impact will be lower but nonetheless still significant since you can’t escape US market”
Xiadong Bao, fund manager at Edmond de Rothschild Asset Management
“The Jan-Feb macro data indicates the recovery is well under way, while the early March high frequency data we’ve seen so far showed a certain weakness, which triggered recent market concerns on a weaker-than-expected recovery. This cut shows the strong commitment of PBOC to support the growth recovery in 2023, especially in the backdrop of a complicated exterior environment”
Mitul Kotecha, head of emerging-markets strategy at TD Securities
“The timing of the cut is a little surprising given the strength of recent data but it is consistent with recent comments by PBOC governor Yi Gang when he highlighted that cuts in the RRR would be an effective way to add liquidity. This is unlikely however, to translate into a cut in Loan Prime rates next week in our view but it does add further, albeit limited support to the economy. CNY trimmed gains on the news but overall we expect the currency to track USD gyrations, with some weakness on a trade weighted basis likely”
Fiona Lim, senior foreign exchange strategist at Malayan Banking Bhd. in Singapore
“An RRR cut at this point will not undermine the yuan much given that it is somewhat expected. USD has also been under pressure with a 25bps hike by the Fed already priced to a significant extent. USDCNH pairing is likely to remain within the 6.83-7.00 range barring fresh signs of bank stress in Europe”
Steven Leung, executive director, UOB Kay Hian
“The global banking crisis, even though it’s been stabilized after the major banks injected money into the banking system but still the situation isn’t yet over. So we really need some more liquidity in the global financial markets since China is in a different cycle – they’ve been loosening the policy. And secondly, if you look at the economic data released in February, it didn’t provide any surprise to the markets. So maybe Beijing recognizes the pace of the recovery is not as strong as they expected”
Xiaojia Zhi, head of research and chief China economist, Credit Agricole CIB
“Easing and looser liquidity should be negative for the yuan, and USDCNH ticked up after the news announcement. But better policy support should help support confidence and sentiment, in turn be more growth supportive, which would be good for CNY but that would take a bit more time.”
Shen Meng, director, Chanson & Co.
“China’s CPI is still low, which gives room for adjustment in monetary policy. The increase between M2 money supply and social financing is still notable. The 0.25 percentage cut can inject approximately 500 billion of long-term funds in order to support fiscal expenditure, which would fund state-owned enterprises’ investments. And with expectations of the Fed’s continued rate hikes, this move ensures stable market flows”
–With assistance from Malavika Kaur Makol, Selina Xu, Ran Li, April Ma and Charlotte Yang.
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