Apr 20, 2018 07:39 PM

Caixin View: PBOC Adjusts Liquidity Management as First Quarter GDP Hints at Slowdown

Within hours of the release of China's first-quarter GDP and March economic data, the People's Bank of China (PBOC) unexpectedly announced a reduction of 1 percentage point in banks' reserve requirement ratio (RRR). Here's Caixin's view on the data and the RRR cut.

One notable takeaway from the Q1 GDP report was the negative contribution of net exports to GDP growth for the first time in five quarters. We see a continued downturn in exports as one of the biggest uncertainties for the growth outlook. Escalating trade tensions with the U.S., continued strength in the yuan (which is a negative for exports), and a global manufacturing slowdown — the JPMorgan Global Manufacturing PMI slipped to a 5-month low in March — all signal challenges for exports later this year.

The rest of the message from the Q1 data was mixed. GDP growth was encouraging, at a better-than-expected 6.8% year on year. Consumption grew particularly rapidly compared with the previous quarter, although we think this can be attributed to seasonal factors, so it's too early to make a call on a sustained pickup in consumer spending. Growth in investment in property development picked up to a three-year high boosted by a significant jump in new starts, which is positive. However, growth in the key segment of infrastructure investment slowed further, and is unlikely to pick up given the constraints on local government funding. The increase in March industrial output was disappointing but retail sales in March saw strong growth. Click here for a more detailed rundown from Caixin.

The surprise cut in the RRR, coming hours after the release of GDP data, was taken by many as a sign of stimulus to support growth on concerns about a slowdown later in the year. But this was primarily an adjustment in the central bank's liquidity management, and was aimed at helping provide liquidity to banks, —especially smaller ones whose funding sources have been squeezed by the deleveraging campaign—and encouraging lending to small companies.

The RRR is currently in a range of around 15% to 17% of total bank deposits. The PBOC said the ratio for most banks would be cut by 1 percentage point effective April 25, and that the move would release about 1.3 trillion yuan ($207 billion) of additional liquidity into the economy. However, banks will first have to use the money to repay loans they have taken out from the central bank through the Medium-term Lending Facility (MLF) over the past few months, which would amount to around 900 billion yuan, with the remaining 400 billion yuan to be used to lend to small companies in order to lower their cost of capital.

Over the last two years, the PBOC has increasingly turned to the MLF and other new liquidity management tools to manage liquidity in the banking system rather than using the RRR, which the central bank has said is too blunt an instrument and could put downward pressure on the exchange rate if used. However, with outstanding MLF loans now amounting to 5 trillion yuan, that's adding to the costs of funding for banks already facing pressure on profitability. With trillions of yuan of idle deposits tied up at the central bank, it makes sense to dip into that money.

Banks pay interest rates of as much as 3.3% to borrow money via the MLF but are only getting 1.62% on their RRR deposits at the central bank. So repaying MLF loans via funds released through an RRR cut will help reduce their interest payments. As the remainder of the new funds can be used for lending, that will also allow the banks to offer borrowers lower interest rates to support the real economy.

Over the last few months the PBOC has raised the cost of borrowing by hiking money-market interest rates, including MLF rates, partly due to the U.S. Federal Reserve's moves to raise interest rates. This has led some observers to believe, mistakenly in our view, that the central bank has been tightening policy, even though it has a stated goal of keeping monetary policy prudent and neutral. The cut in the RRR will help to correct that misunderstanding. However, further cuts in the RRR are unlikely as they would swing the dial too far the other way, signalling looser monetary policy.

Weekly Roundup

Macro & Finance

China announced Tuesday a hefty anti-dumping tariff on imports of the grain sorghum from the U.S., hours after Washington banned Chinese telecom equipment-maker ZTE Corp. from buying components from American suppliers for seven years.

The U.S. has agreed to negotiate with China to resolve their disputeover intellectual property rights and American tariffs on some Chinese metal exports, filings with the World Trade Organization (WTO) showed.

The Communist Party has given the go-ahead to a plan to turn the southern island province of Hainan into a free trade zone (FTZ), which will be the largest in the country. Government support will be granted for the setup of exchanges of international energy, shipping, commodities and carbon trading in the province. Hainan will also begin to grant visa-free stays to 59 nationalities, amid a push to transform itself into “China’s Hawaii.”

New foreign investment negative lists will be published by the end of June, China's top economic planning body said in a statement Tuesday. The lists will reduce the number of sectors in which foreign investment is restricted and offer a clearer roadmap of measures for greater market access in the coming years.

Long-awaited regulations to rein in the asset management industry will finally be issued as soon as the end of this month, an official close to the central bank said, responding to reports that the rules would be delayed to avoid rattling financial markets already nervous about the impact of trade tensions between China and the U.S.

The government of Hebei province in central China has approved a development plan to revitalize Caofeidian, a once-promising industrial zone, now reportedly a ghost town despite receiving billions of yuan in investment.


Official media on Wednesday accused the U.S. of trying to stifle China's high-tech development and politicizing competition, after Washington imposed punitive sanctions on ZTE Corp., one of the nation's high-tech champions. Click here for a timeline of the ZTE sanctions story.

China's anti-corruption agency is investigating the head of China Huarong Asset Management Co. Ltd., the country’s largest distressed-asset management company. Sources told Caixin the investigation is focused on support for a privately owned electrolytic manganese producer that was used to cover up the state-owned financial conglomerate’s investment failures.

China's once-acquisitive conglomerate HNA Group sold its holdings in a Guangzhou bank, the group's latest asset sale following a years-long global buying spree that left it with huge debt.

A subsidiary of debt-ridden conglomerate LeEco will soon obtain investments totalling about 2.74 billion yuan ($437 million) from a group of Chinese property and tech giants led by Tencent Holdings and Inc.


April 25-27: National People’s Congress Standing Committee to meet, to review proposed legislation on a number of topics, including the establishment of a financial court in Shanghai. They will also consider a report on environmental protection.

April 27: National Bureau of Statistics to release March data on industrial profits.

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