PBOC's Ma Says New Tools Substitute for Bank Reserves Cuts

  • China's central bank has added liquidity via market channels
  • Top economist speaks in China Central Television interview

China’s central bank is substituting new tools to step up cash injections with open-market operations instead of cutting the required reserve ratio for big lenders, according to the monetary authority’s chief economist.

The People’s Bank of China has added liquidity support through three different channels as an alternative to cutting the reserve requirement ratio for major lenders, Ma Jun, chief economist at the monetary authority’s research bureau, said in an interview Wednesday with China Central Television. Ma is not in a policy making role.

The PBOC’s recent liquidity support is acting as a "substitute for a reserve-ratio requirement cut," Ma told the state-run broadcasting network.

The cash injections come as slower economic growth spurs capital outflows and amid a seasonal rise in demand for cash ahead of the week-long Chinese New Year holiday, which starts next month. China on Tuesday reported fourth-quarter gross domestic product growth slowed to 6.8 percent, while industrial production, retail sales and fixed-asset investment growth all slowed at the end of 2015.

Retooled Framework

The liquidity injections reduce the likelihood of a required reserve ratio cut in the short to medium term as the coming liquidity supply is equivalent to a RRR reduction, Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong, wrote in a report. The PBOC may be preferring market-based ways of adding funds as it retools its monetary policy framework and seeks to avoid further yuan depreciation expectations.

Money market conditions remained tight Wednesday despite the PBOC injections. China’s 14-day money-market rate jumped the most in 13 months as capital outflows and cash hoarding in the runup to the Lunar New Year holidays outweighed central bank injections. The Shanghai Composite Index closed 1 percent lower, and is down 16 percent this year.

The cash injections will play a positive role in helping to stabilize market expectations and interest rates, Ma said in an interview with CCTV. He cited three of the central bank’s liquidity tools: the Medium-Term Lending Facility, Standing Lending Facility and Pledged Supplementary Lending tools.

The PBOC may want to avoid using a broad policy tool such as RRR because it may add downward pressure on the yuan, said Ming Ming, head of fixed income research at Citic Securities Co. in Beijing who formerly worked in the PBOC’s monetary policy division. The yuan fell to a five-year low last week and is down almost 6 percent over the past year.

The PBOC has announced more than 1 trillion yuan ($152 billion) worth of injections via the avenues Ma noted as well as reverse repurchase agreements since Thursday, with almost half of that concentrated in a 410 billion yuan MLF operation announced late Tuesday, according to Bloomberg calculations.

The central bank added cash again for a fifth-straight day late Wednesday, announcing 150 billion yuan of six-month funding as part of its Short-term Liquidity Operations.

"This clearly points to further easing bias in China’s monetary policy, especially after the weak GDP figures," Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a report Tuesday. "The size of this round of liquidity injection is almost equivalent to a 50 basis-point cut to the reserve requirement ratio."

The last RRR cut was in October, when the PBOC lowered the ratio for major banks to 17.5 percent. The central bank at the same time cut the main lending rate to a record low 4.35 percent, the sixth-straight reduction since late 2014.

— With assistance by Zheng Wu

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