Analysis: China’s RRR Recalls that economies remain fragile


The headquarters of the People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China on September 28, 2018. REUTERS / Jason Lee / File Photo

LONDON, July 9 (Reuters) – China’s decision on Friday to give its economy a 1,000 billion yuan ($ 154 billion) boost reminded investors that even the largest economies are likely to need an occasional boost. as long as the coronavirus pandemic lasts.

In one of its signature moves on Friday night, the People’s Bank of China (PBOC) cut its reserve requirement ratio (RRR) – money banks must park at the central bank for security reasons – by 50 points base (bp).

This is the first such step since April of last year, when COVID was spreading rapidly around the world. Just as significantly, it puts an end to nine months of gradual policy tightening by authorities keen to keep credit growth from spiraling out of control.

“We believe this marks the shift from a counter-cyclical tightening to an easing bias,” Morgan Stanley analysts said, “given recent growth hiccups amid Covid resurgence, chain disruptions supply and continued moderation in domestic consumption “.

UBS Head of Emerging Markets Strategy Manik Narain said the move was a setting rather than a sharp turnaround for the PBOC. About 400 billion yuan of the 1,000 billion that the RRR is estimated to be worth is expected to be used to repay the existing financing of the PBOC’s “Medium-Term Lending Facility”, while 700 to 750 billion in tax payments are also due soon.

But, from a global perspective, it was a sharp reminder that leveraging COVID support measures won’t be a smooth ride for anyone.

“China was first in, first out (with the support of COVID policy),” Narain said. “So if you think about the global importance, it’s possible that the message here is that the PBOC shows that economies are somewhat fragile and that inflation shouldn’t be too damaging in the medium term.”


The PBOC’s decision comes amid the rapid re-acceleration of global COVID cases.

At the same time, however, the US Federal Reserve is wondering when to reduce its asset purchases and near-zero interest rates it put in place last year and emerging market heavyweights like Brazil. , Mexico and Russia are already raising interest rates to cope with spikes in inflation.

The bond market appears to be reacting to the turnaround in the rate cycle in China by anticipating a decline in medium-term interest rates. Even before the RRR’s announcement, hints earlier this week that a decline was imminent led the Chinese 10-year government bond yield to post its biggest weekly drop this year.

Many Chinese observers believe pent-up demand for COVID has now peaked and its growth rates will now moderate, weighed down by weakening exports, surging producer price inflation and continued crackdowns of Beijing in the real estate market.

However, the economy is still expected to grow by more than 8% this year, compared to the government’s modest growth target of more than 6%, which suggests that there is no great pressure to step up l ‘relaxation.

“We expect fiscal policy to remain focused on the specific sectors most affected by the pandemic, such as small businesses. We also expect macroprudential tightening in the real estate market to remain in place,” said Gustavo Medeiros, director research assistant at Ashmore Group.

UBS’s Narain said another conclusion from Friday’s decision was that other major emerging markets would likely see it as a sign of things to come in their own economies.

“If I’m the head of the central bank of Mexico or Brazil and I’ve already raised rates, that also tells me that the cycle of (interest rate) hikes is likely to be shallow.”

($ 1 = 6.4795 yuan Chinese renminbi)

Additional graphic by Karin Strohecker Editing by Mark Potter

Our Standards: Thomson Reuters Trust Principles.


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