Nomura sees RRR cut ahead of Chinese New Year

Source: Xinhua | 2018-12-25

NOMURA expects China’s central bank to cut the reserve requirement ratio a total 250 basis points next year, with the first cut likely come in January as market demand for liquidity is expected to surge ahead of the country’s Lunar New Year the following month.

Nomura said it based its forecast on China’s liquidity conditions and the need to support growth.

And the first 100-basis-point cut will be highly likely to come in January, ahead of the country’s traditional new year falling on February 5, as the holiday usually sees seasonally stronger liquidity demand.

If there is no further support from monetary easing or stimulus measures, the liquidity gap over January-February would reach 3 trillion yuan (US$4.35 billion), with two thirds coming from seasonally higher liquidity demand, Nomura said.

The research team said that the first cut could inject 1.3 trillion yuan of liquidity into the banking system, based on the central bank’s estimates.

Compared with other policy measures, such as the medium-term lending facility or the recently introduced “targeted medium-term lending facility,” a cut in the RRR — the amount banks must hold in reserve to cover outstandings — is preferred by banks, as such funds are cheaper and more stable.

The PBOC’s interest rate on commercial banks’ required reserve for deposits is just 1.62 percent, much lower than the one-year MLF and TMLF rates of 3.30 percent and 3.15 percent respectively.

A lending facility is a source of funds that can support financial institutions in asking for additional capital.

The PBOC this month introduced TMLF to encourage commercial banks to increase lending to small and private firms. The PBOC has cut the RRR four times by a combined 250 basis points so far this year.