Offshore Yuan Drops on Bets PBOC Will Cut Reserve Ratio by March

  • China to lower policy rate 25bp, RRR by 50bp: Credit Agricole
  • Nation will arrange more than 600b yuan to boost liquidity

The offshore yuan fell for a second day after China’s economic growth slowed to the least in 25 years, fueling speculation the central bank will ease monetary policy further.

The People’s Bank of China should cut the amount of cash lenders need to set aside as reserves to adjust to changes in financial institutions’ yuan positions and market liquidity, according to a front-page commentary in the China Securities Journal on Wednesday. The nation could reduce benchmark interest rates by 25 basis points and banks’ reserve requirements by 50 basis points by the end of March, Dariusz Kowalczyk, a Hong Kong-based senior emerging-market strategist at Credit Agricole CIB, wrote in a note.

"China’s monetary policy will be biased toward the loose end throughout this year and the PBOC will very likely cut reserve ratios in the first quarter," said Liu Xuezhi, a macroeconomic analyst at Bank of Communications Co. in Shanghai. "The PBOC won’t likely allow sharp declines in the yuan because that’ll lead to capital outflows and financial instability."

The yuan traded in Hong Kong dropped 0.18 percent to 6.6025 a dollar as of 4:42 p.m. local time, data compiled by Bloomberg show. The onshore currency in Shanghai was little changed at 6.5793, according to China Foreign Exchange Trade System prices. The monetary authority strengthened the reference rate by 0.03 percent to 6.5578.

MLF Injections

The PBOC provided 410 billion yuan ($62.3 billion) to commercial lenders via its Medium-term Lending Facility on Tuesday and lowered interest rates on the loans. The monetary authority will arrange more than 600 billion yuan in funds to meet banks’ liquidity demand before the week-long Chinese New Year holidays that start Feb. 8. The move may essentially play the role of a reserve-ratio cut, Ma Jun, chief economist at the central bank’s research bureau, said in an interview with China Central Television.

The central bank’s foreign-exchange assets tumbled by an unprecedented 708 billion yuan to 24.85 trillion yuan in December, data showed Friday. That compares with a drop of 2.21 trillion yuan for the whole of 2015. Currency reserves slid $107.9 billion last month, when the yuan fell 1.5 percent in its biggest slump since an August devaluation.

China’s gross domestic product increased 6.8 percent from a year earlier in the fourth quarter, less than the median estimate of 6.9 percent in a Bloomberg survey, according to data Tuesday. The economy lost momentum even as the PBOC cut benchmark interest rates six times since November 2014 and relaxed banks’ reserve requirements. The nation’s imports dropped for a 14th month in December, and its producer-price index extended a record stretch of declines to 46 months.

— With assistance by Tian Chen

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