China Banking Official Urges Cut to Required Reserve Ratio

  • People’s Bank of China has held ratio at 17% since February
  • Economists don’t forecast reduction until late next year

China’s requirement for how much cash banks must hold as reserves is “very high” and should be reduced at an “appropriate time,” a senior banking regulator said, according to a media report.

Other financing tools can be used to manage the money supply after easing the required reserve ratio, China Banking Regulatory Commission official Yu Xuejun said at an event in Beijing, Shanghai Securities News reported Wednesday. New monetary tools such as the medium-term lending facility are best used after a cut, not before, Yu was cited as saying.

The People’s Bank of China has held the RRR at 17 percent since February after four cuts last year. It will be decreased to 16.5 percent in the fourth quarter of 2017 then 16 percent in the first quarter of 2018, according to a Dec. 9-15 Bloomberg survey of economists.

The PBOC started to use MLF in 2014 to channel low-cost funds into banks while avoiding conditions that would fuel asset bubbles. It also introduced the pledged supplementary lending tool, which steers cheap credit to state-backed policy lenders such as the China Development Bank to support efforts such as shanty town renovation and water projects.

Lowering the ratio lets banks lend more, which boosts credit expansion. Frequently reducing the ratio can reinforce expectations for monetary easing, which would add to downward pressure on the yuan, the PBOC said in its second quarter monetary policy execution report.

Yu leads a panel with oversight responsibility for major State-owned financial institutions, according to the CBRC’s website.

There’s little chance of an RRR cut in 2017 given the PBOC’s neutral monetary policy stance and the potential to fan fears of capital outflows and yuan depreciation, according to Gao Yuwei, a researcher at the Bank of China Ltd.’s Institute of International Finance in Beijing.

"The central bank has been injecting liquidity through open market operations and MLF," he said. "We believe it will continue to use that combination to contain financial risks and cut leverage."

(A previous version of this story corrected the day of the report in the second paragraph.)

— With assistance by Yinan Zhao

(Updates to add analyst comment in last two paragraphs.)
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