PBOC Plans to Amend Reserve Method to Reduce Cash Volatility

  • China’s central bank wants to reduce swings in money market
  • Major banks are required to hold 17% of deposits in reserve

China’s central bank will further adjust how it assesses the amount of deposits banks must set aside with it as reserves to help ease swings in cash markets.

From July 15, the People’s Bank of China will check banks’ average deposit value during a certain period, instead of at the end of a period, it said in a statement late Friday. Bloomberg News reported the adjustment earlier, citing people familiar with the plan.

It’s another incremental step toward mitigating volatility in money markets, which historically had severe fluctuations at the end of each quarter when banks are eager to reduce their deposit amounts to meet the reserve ratio required by the PBOC.

"This policy further smooths out the volatility that banks may face in the reserves placed at the central bank," Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong, wrote in a note. Unless deposits are volatile day by day, "the refinement in the policy should not affect the amount of reserves that banks need to pay significantly."

China’s central bank uses the required reserve ratio to control the amount of cash available in the economy. Major banks are required to hold 17 percent of deposits in reserve, a relatively high rate compared with global peers.

The overall impact on liquidity levels should not be significant, and money market rates should be more stable in the shortest tenors as a result of the policy change, Australia & New Zealand Banking Group Ltd. researchers David Qu and Louis Lam wrote in a report.

"As the deposits of banks are significantly higher at quarter-end, it places stress on the banks to fulfill the requirements on the fifth day of the following quarter, under previous rules," they wrote. The new rules will help curb "sudden liquidity demand caused by the deposit fluctuations."

— With assistance by Yinan Zhao

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