They’ve been busy little bees at the People’s Bank of China.
Justin had the news on two moves from the Bank:
On the Reserve Requirement Ratio (RRR) cut, this is sort of encouraging news on the one hand and sort of concerning on the other hand. On the plus side … but first some background if you need it:
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.
So, the decrease is encouraging, banks will have more yuan to lend and is a boost, at the margin, to the economy.
Now for the concern. The move has come the day before China releases its latest key data, that for August. See screenshot (ICYMI here):
It’s a bit worrying that the PBoC has moved to increase stimulus the day before this data release. Perhaps the data … stinks? We’ll soon find out.
On that second post linked above, the one about the bank requesting a hold on dollar buying, Justin summed it up nicely:
- It is said that the PBOC has asked some of the big banks to refrain from immediately squaring their market positions and to let it run open in order to alleviate further downside pressure on the Chinese yuan.
Sheesh, also maybe not that encouraging.
This article was written by Eamonn Sheridan at www.forexlive.com. Source