China’s central bank will inject 300 billion yuan ($47.05 billion) into commercial banks from Jan 25 to ease liquidity conditions and support lending to small and microsized enterprises, startups and agricultural production.
The injection will take place through a targeted cut of the cash amount that should be reserved－the reserve requirement ratio (RRR)－by 0.5 to 1.5 percentage points for commercial banks which have offered a certain amount of loans for those sectors.
A statement from the central bank said that the cut might start on Jan 25.
The 300 billion yuan unbound capital, accompanied by another temporary RRR cut to free around 2 trillion yuan as predicted around the Lunar New Year holiday period, would strengthen banks’ credit and prevent liquidity squeeze in the financial markets, said economists.
Zeng Gang, director of banking research at the Chinese Academy of Social Sciences’ Institute of Finance and Banking, said the moves may encourage loan issuances by commercial banks and increase their profits, as the interest margin is expected to be enlarged.
The potential influence has been reflected in the stock market earlier than the actual RRR cut. On Jan 24, the Shanghai Composite Index, the country’s benchmark stock index, rose for the seventh straight trading day to 3,559.47 points, up 0.37 percent from Jan 23, led by a 0.68 percent rise in stocks from the financial sector.
The stock price of Shanghai Pudong Development Bank rose by 5.19 percent, while that of CITIC Securities jumped 8.06 percent on Jan 24.
The boom in the stock prices of financial institutions has supported a 7.41 percent rise in the composite index this year.
As deleveraging remains one of the policy priorities this year to crack down on financial risks, new regulations have been launched this year including rules on bond repos and negotiable certificate of deposits, which economists worried could lead to another round of bond sell-offs, as the market rates and bond yields may continue to rise in the near term.
Monetary policy may be biased toward tightening this year, said Zhu Haibin, chief China economist with JPMorgan Chase & Co, and it may result in liquidity concerns, which will likely be more volatile going into the first quarter due to seasonal factors and regulatory changes.
The annual monetary policy tone has been set by the Central Economic Work Conference in December as “prudent and neutral”, thus a targeted and temporary adjustment of liquidity cannot be seen as an overall easing, said economists.
As part of the monetary policy operational framework, the PBOC has been opting for targeted measures since 2017, including the targeted RRR cut, to guide funds into the most needy sections of the real economy to shore up higher-quality growth, without injecting excessive money.