China: PBoC could cut the RRR further in the next months – UOB

UOB Group’s Economist Ho Woei Chen, CFA, comments on Friday’s decision on rates by the PBoC.

Key Takeaways

“The People’s Bank of China (PBoC) kept its Loan Prime Rate (LPR) unchanged with the 1Y LPR and the 5Y & above LPR set at 3.85% and 4.65% respectively…”

“The central bank has also maintained steady liquidity injections in its open market operations to offset maturities since March while the stability in the overnight interbank rate also pointed to sufficiently ample market liquidity.”

“There is no indication that the PBoC will move to ease monetary policy in a big way even though China’s growth is expected to moderate more evidently in 2H21.”

“Following the 50 bps cut to banks’ Reserve Requirement Ratio (RRR) in July, we continue to see the likelihood of another 50 bps cut before year-end but this is likely to be targeted rather than broad-based as the RRR for the small banks (rural banks with assets (<CNY10 bn) is already at a record low level of 5.0-5.5% (base rate 5.5%). There is more scope to cut the RRR for banks in the first and second tranche which are currently at 10.5-12.0% (base rate 12%) and 6.5-10.0% (base rate 8-10%) respectively.”

“Given PBoC’s concerns of financial imbalances, we continue to keep our forecast for the 1Y LPR and the 5Y & above LPR unchanged for the rest of 2021 at 3.85% and 4.65% respectively. This is in line with PBoC’s stance to maintain a prudent monetary policy which will be flexible and targeted, and providing reasonable and sufficient liquidity in the financial system.”