China’s State Council signaled the central bank could make more liquidity available to banks in order to boost lending to businesses, including by cutting the amount of money they have to keep in reserve. Bond yields fell.

Authorities “will use monetary policy tools, including a cut to the reserve requirement ratio at an appropriate timing to enhance financial support to the real economy, particularly to smaller businesses,” the government said in a statement Wednesday after a meeting of the State Council, the equivalent of a government cabinet, chaired by Premier Li Keqiang. That’s aimed at helping firms deal with the impact of rising commodity prices, it said.

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Beijing’s Signal of RRR Cut Comes With Many Caveats: China Today

China’s robust recovery from the pandemic has shown signs of faltering recently, with soaring commodities pushing factory-gate prices to a 13-year high in May and a gauge of activity in the services industry slowing sharply in June, partly because of virus outbreaks in some parts of the country.

The State Council’s shift may indicate the government expects disappointing data when it reports second-quarter gross domestic product and June activity figures next week. Economists surveyed by Bloomberg expect a slowdown in GDP growth to 8% in the second quarter from 18.3% in the previous three months.

“A shift to some kind of policy easing in the second half is no surprise,” Nomura Holdings Inc. economists led by Ting Lu said in a note. “But using a high-profile tool such as RRR cut is a big surprise to markets and us.” Nomura expects the central bank to most likely deliver a 50 basis-point universal RRR cut in coming weeks.

Bond Yields

China’s 10-year bond yields dropped three basis points to 3.03%. Futures for the benchmark gained as much as 42 ticks to its highest level since August.

“Beijing now wants to make further moves to boost the economy, support smaller enterprises and limit credit risks when external demand for Chinese goods peak,” said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. in Singapore. “This will offer an extra stimulus to bonds.”

Allowing banks to reduce their reserves would free up the flow of credit to the wider economy. However, it’s not definite that the central bank will follow through: the last time the State Council suggested cutting the RRR was in June last year, but the People’s Bank of China didn’t end up taking any action.

Even so, the mention of RRR cuts after more than a year was “notable and probably increases the chance of an actual implementation of the cut,” Goldman Sachs Group Inc. wrote in a note. The State Council’s statement had a clear “pro-growth” shift, focusing on the need to increase financial support to the real economy, the economists said.

What Bloomberg’s Economists Say…

The meeting may signal a turning point for liquidity conditions is approaching — the PBOC may marginally ease liquidity from a previously tight tilt to a neutral or marginal easing stance. But overall conditions are unlikely to allow the PBOC to reduce interest rates.

— David Qu, China economist

For full note, see here

The PBOC hasn’t cut the official RRR since mid-2020, when it was trying to boost the economy after the lockdowns to contain the Covid-19 outbreak. The central bank has refrained from making any changes to its policy interest rates as well since cutting them early last year, choosing instead to guide credit growth lower to curb financial risks. The central bank said last week it will maintain a steady policy and prevent “external shocks” from overseas policy changes.

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The State Council’s comments came a day after a former PBOC official called for interest rates to be cut in the second half of the year to safeguard the recovery and create policy room to deal with the Federal Reserve’s future tightening.

Authorities are still wary of overstimulating the economy though, with the State Council saying it will refrain from flooding the economy with stimulus and maintain the stability and effectiveness of monetary policy.

China’s state media cited China Minsheng Banking economist Wen Bin as saying there could be a cut to the RRR for small and medium-sized financial institutions by the end of the third quarter.

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 favored tool of the central bank’s efforts in recent years.

The bank can cut the ratios for different types of banks or for different types of lending at specified banks, such as the “inclusive financing” RRR cut, which it has done annually since 2017.

— With assistance by James Mayger, Yujing Liu, Enda Curran, Hwee Ann Tan, and Tian Chen