Quick cash – the central bank’s Lunar New Year gift to China’s big lenders
PBOC opts for another tweak rather than traditional monetary policy to fend off threat of holiday funds crunch
China’s central bank has come up with a targeted way to inject up to 1 trillion yuan (US$153 billion) in fast funds into big banks during the country’s biggest holiday, the latest in a series of smaller tools to stave off a cash crunch.
Under the new “provisional reserve arrangement”, any big lender in need of cash around the Lunar New Year can ask the People’s Bank of China (PBOC) to lower its reserve requirement ratio (RRR) by two percentage points for up to 30 days.
The ratio is the share of deposits banks must store at the central banks as reserves, which in China is about 17 per cent.
China’s big five banks – Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, and Bank of Communications – as well as countrywide lenders such as China Merchants Bank, will qualify for the offer.
The temporary cut in RRR will give the banks more funds to lend without having to pay interest to the central bank. That compares to the 1.62 per cent interest banks have had to pay to the PBOC for 28-day temporary liquidity facility loans offered during previous holidays.
China Minsheng Banking chief macro economist Wen Bin said the benefits could flow to smaller players.
“The new tool gives major banks a large amount of liquidity without cost and could therefore encourage them to lend money to smaller banks or non-banking financial institutions,” Wen said.
Cash crunches have become a bigger worry in recent years, with China’s outstanding broad money supply rising to 167 trillion yuan, or over 200 per cent of gross domestic product, at the end of November. The central bank’s balance sheet has also grown to 36 trillion yuan, surpassing that of the US Federal Reserve.
The PBOC has sought to fend off those threats with regular open market operations and a series of short-term liquidity tools to ensure smooth operations at specific times of the year, including major holidays.
That is because it has largely abandoned traditional monetary policy such as changes to benchmark interest rates or reserve ratios. When the Fed raised its policy rate by another quarter of a point this month, the PBOC responded by engineering a 5 basis point rise in interbank market rates.
In addition, Beijing has held off on across-the-board RRR cuts to avoid signalling monetary loosening.
The central bank says the tweaks – rather than wholesale changes – are prudent monetary policy, but they also reflect the PBOC’s dilemma in trying to promote growth while curbing debt. If it loosens policy too much, it risks controlling leverage, but if it reins it in too much it could cause an immediate cash crunch.
“The authorities do not want to see a fast rise in market rates, although it will uphold the prudent and neutral monetary stance to facilitate financial deleveraging,” Wen said.
China International Capital Corp chief economist Liang Hong said the new tool could add about 1 trillion yuan in cash to the market, ease market concerns about liquidity and prevent market volatility.
Liang warned that the existing 17 per cent RRR for large banks was higher than the rest of world and boosted regulatory arbitrage.
“It is a trend to normalise the reserve requirement ratio from the medium- and long-run perspective,” she said.