Leaked information reveals PBoC’s reluctance to slash RRR

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 25, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - The information from minutes of meeting between the PBoC and commercial lenders held last Tuesday got leaked. The information which was published on major mainland online portals including Sina.com and Netease.com highlights the dilemma of the central bank in slashing RRR while keeping the currency from falling further. It was evident from the minutes that PBoC is hesitant in cutting RRR fearing that such a move would further weaken the currency. At the same time the central bank is aware that it needs to raise liquidity to support a slowing economy. Thus the central bank is now faced with conflicting goals.

    The required reserve ratio or RRR refers to the amount of deposits that commercial lenders have to keep with the central bank as reserves. Less the RRR the more cash commercial banks will have to lend out. This will raise the capital supply in the economy so that demand can be boosted and growth momentum picks up. However, more liquidity will carry the risk of yuan being devalued further.

    As pointed out by Zhang Xiaohui, an assistant central bank governor in charge of monetary policy, the central bank will have to tread carefully as it has to sustain the stability of the exchange rate while handling liquidity concerns at the same time. Zhang reminded how slashing of interest rates and RRR in October “increased yuan depreciation expectations and added pressure on the yuan to weaken”. He feels “A too-loose liquidity situation may result in relatively big pressure on the yuan exchange rate”. He is also of the opinion that the central bank should consider other instruments to supply liquidity as he thinks “A cut in the required reserve ratio would be too strong a signal [to send to the market]”. The central banks can thus be expected to increase liquidity through other open-market operations less drastic than RRR slash.

    The Lunar New Year period is the time when cash demand is at the highest. To help banks meet the increased demand for cash the PBOC is likely to release an extra 1.6 trillion yuan (HK$1.9 trillion) into the banking system. This year the Lunar New Year will fall in the month of February. Zhang however does not favour an increase in the injection of funds arguing that the central bank already has lent out over 1.7 trillion yuan in January and thus it is required to slow down the lending.

    A vice-governor of the PBOC, Yi Gang has also warned banks against lending spree reminding them of 2009 when several loans had turned bad as they could not be collected back. Yi’s statement also indicated the central bank’s seriousness in maintaining the stability of the yuan. He said “Some individual bank clients are sending messages to their clients, encouraging dollar buying ... If you spread false information to cause panic, relevant authorities will come after you”.

    Haitong Securities chief economist Li Xunlei attempting to explain the leaked information said that the memo probably hinted at the fact that the possibility of a RRR cut this year small and that of an interest cut is “even smaller”. He feels this time is not favourable for “China to conduct exchange rate reform and yuan internalisation”.
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