PBOC May Cut RRR After 9-Month Drop in Yuan Funds Outstanding for Foreign Exchange
Yicai Global
/SOURCE : Yicai
PBOC May Cut RRR After 9-Month Drop in Yuan Funds Outstanding for Foreign Exchange

(Yicai Global) Aug. 15 -- The People's Bank of China, the country's central bank, is likely to cut thereserve requirement ratio, or the amount of liquid assets held by commercial banks, in the near future, market experts have told Yicai Global.

The reserve requirement ratio is closely correlated with funds outstanding for foreign exchange. Over the past nine months there has been a continuous decline in Chinese yuan funds outstanding for foreign exchange, which stood at CNY23.44 trillion (USD3.53trillion) at the end of last month, down CNY190 billion month-on-month.

Funds outstanding for foreign exchange are fundsPBOC pays financial institutions, including commercial banks, each month in exchange for the foreign currency they receive from trade surpluses, foreign investments and other sources.

If funds outstanding for foreign exchange continue to decline in China, it will provide the room as well as necessity for an RRR cut by PBOC, Mr. Wen Bin, chief analyst at China Minsheng Bank, said.

Since the last RRR cut in March, the central bank increased the money supply on the open market to offset the decline in foreign reserves through reverse repurchase and medium-term lending facility.

"An RRR delivers the ultimate desired results, while manipulation on the open market is of a short-term nature," says Mr. Wen, "Furthermore, the costs of the two measures are different. Commercial banks need to pay higher interest to obtain liquidity through MLFs."

Mr. Li Huiyong, chief macroeconomic analyst at Shenwan Hongyuan Securities, also believes that the likelihood of an RRR cut has increased now.

In its second-quarter monetary policy implementation report issued on Aug. 5, the central bank stressed that frequent RRR cuts could strengthen market expectations for policy loosening, leading to growing depreciation pressure on local currency and falling foreign exchange reserves.

However, some market participants argue that the worries are not justified. Many seasonal factors were at play in July, and external liquidity is improving judging by the overall foreign reserve situation. Moreover, the decline in funds outstanding for foreign exchange has slowed in pace, despite its downward trend over the past several months.

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