ICYMI – PBOC to cut reserve requirement ratio by 50bp from 5 February

The People’s Bank of China missed its chance to cut interest rates for the real economy earlier this week, leaving the loan rates fixed at:

• 3.45% for the one year
• 4.20% for the five year
• PBoC Loan Prime Rates (LPR) are unchanged @ 1 year 3.45% & 5 year 4.20%. As expected

These are very, very high rates in real terms, with inflation running negative in the country.

Instead, the PBoC have cut the reserve requirement ratio, which in effect frees up more funds for lending by banks. And thus generating more juicy high returns.

Justin had the news as it happened:

• PBOC to cut reserve requirement ratio from 5 February

Adam followed up:

• China finally turns on the taps. Is this it?

This is weak stuff from the PBoC. The bank fears that loosening monetary policy will result in a run on the yuan and capital flight from the country. I suspect the edict from Chinese Communist Party Chair Xi Jinping is to proper up the currency at all costs so he can strut around the world stage promoting the RMB as a “reserve currency”. Meanwhile global funds are pulling money out of the country where and when they can, and not investing/reinvesting. Anyone looking around for a reserve currency to stash funds in are not going to select one subject to the whims of the Chinese Communist Party.

Let’s see how stocks in China respond today. Hong Kong got a boost yesterday:

• The Hang Seng index rallies going into the close as China announces RRR cut
  
• Dead cat bounce?

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The Reserve Requirement Ratio (RRR) is a central bank regulation that sets the minimum amount of reserves each bank must hold in relation to their deposit liabilities. Its the percentage of total deposits that banks are legally required to keep on hand, either as cash in their vaults or in a reserve account at the central bank.

• In China, this ratio is set by the People’s Bank of China (PBOC).
• By adjusting the RRR, the PBOC can influence the lending capacity of commercial banks. For example, an increase in RRR means that banks have less money to lend out because they have to keep more in reserve. This reduces the money supply in the economy. Conversely, if the PBOC decreases the reserve ratio, banks have more money to lend because they are required to keep less in reserve. This increases the money supply in the economy, which can stimulate economic activity.

This article was written by Eamonn Sheridan at www.forexlive.com. Source