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27 Feb 2015
China: More targeted RRR cuts for small banks reported - Nomura
FXStreet (Bali) - Nomura Economists note that new targeted RRR cuts for small banks in China, reported by Chinese-language newspaper National Business Daily, may help ease liquidity conditions but should have a limited impact on economy.
Key Quotes
According to the Chinese-language newspaper National Business Daily, the reserve requirement ratio (RRR) of some 23 city and non-county rural commercial banks in the Zhejiang Provinces were cut by an extra 50bp recently (unconfirmed). The Bank of Beijing and Shenjing Bank’s RRR had been cut an extra 50bp earlier, according to the report.
If this turns out to be true, this would have been a follow-up move after the February across-board RRR cut as it allows city and non-county rural commercial banks’ RRRs to be cut by an extra 50bp if they satisfy the prudent operations and adequate loans to small- and micro- enterprises requirement.
We expect more city and non-county rural commercial banks to be eligible for the extra 50bp RRR cut, which we estimate may inject up to RMB130bn in liquidity. This should help ease inter-bank liquidity conditions somewhat as these financial institutions are major borrowers in the interbank market. The 7-day repo rate has risen on average to 4.7% in February from 3.4% in November 2014 when the benchmark rates cut took place
However, this move should have a limited impact on the real economy as the liquidity injection is minor, while headwinds in the economy (such as severe overcapacity, high leverage and the ongoing property market correction) have been strong. We continue to expect monetary policy to ease further, including a 25bp policy interest rate cut in Q2 and 50bp cuts in the banks’ reserve requirement ratio in each quarter for the rest of the year (see China: Five reasons to expect a lot more monetary easing in 2015, 4 February 2015).
Key Quotes
According to the Chinese-language newspaper National Business Daily, the reserve requirement ratio (RRR) of some 23 city and non-county rural commercial banks in the Zhejiang Provinces were cut by an extra 50bp recently (unconfirmed). The Bank of Beijing and Shenjing Bank’s RRR had been cut an extra 50bp earlier, according to the report.
If this turns out to be true, this would have been a follow-up move after the February across-board RRR cut as it allows city and non-county rural commercial banks’ RRRs to be cut by an extra 50bp if they satisfy the prudent operations and adequate loans to small- and micro- enterprises requirement.
We expect more city and non-county rural commercial banks to be eligible for the extra 50bp RRR cut, which we estimate may inject up to RMB130bn in liquidity. This should help ease inter-bank liquidity conditions somewhat as these financial institutions are major borrowers in the interbank market. The 7-day repo rate has risen on average to 4.7% in February from 3.4% in November 2014 when the benchmark rates cut took place
However, this move should have a limited impact on the real economy as the liquidity injection is minor, while headwinds in the economy (such as severe overcapacity, high leverage and the ongoing property market correction) have been strong. We continue to expect monetary policy to ease further, including a 25bp policy interest rate cut in Q2 and 50bp cuts in the banks’ reserve requirement ratio in each quarter for the rest of the year (see China: Five reasons to expect a lot more monetary easing in 2015, 4 February 2015).