Gov't more likely to use open market tools to boost liquidity

Updated 2017-09-07 09:30:43 Global Times

Market speculations are on the rise that the central government might soon lower the reserve requirement ratio (RRR), the level of cash banks are required to hold as reserves, as an appreciating yuan has given space for such policy adjustment.

But the analysts the Global Times talked to on Wednesday insisted that it's unlikely that the government would change the tone of the monetary policies in 2017, which is keeping it stable and neutral.

The 21st Century Business Herald on Wednesday cited Guan Tao, a former official at the State Administration of Foreign Exchange, as saying that an RRR cut might be possible as the appreciation of the yuan has broadened the room for policy intervention.

Domestic news site wallstreetcn.com also cited a financial management expert, Sun Haibo, as saying that the government might cut RRR before the end of September, as the domestic liquidity level has reached a level of "extreme inadequacy" judging by excess reserves, which refers to bank reserves in excess of a reserve requirement set by a central bank.

The excess reserve rate at domestic financial institutions slumped to about 1 percent around mid-August, compared with 1.4 percent by the end of June, the China Securities Journal reported on August 23. The decline in the excess reserve shows that banks are short of liquidity.

Tight liquidity

Xi Junyang, a finance professor at the Shanghai University of Finance and Economics, said that it's unlikely that the government would lower the RRR because the reference for such policy arrangement is not banks' liquidity level, but the country's economic status.

"Judging from the excess reserve ratio, Chinese banks are indeed faced with tight liquidity, but that's a short-term phenomenon and the government is more likely to use open market tools, such as reverse repos, to cope with the situation, rather than launch RRRs," he said.

The People's Bank of China (PBOC), China's central bank, conducted reverse repos amounting to 40 billion yuan (.13 billion) on Wednesday, data from the PBC showed. The PBC has conducted reverse repos for three trading days in a row.

Xi said that domestic banks' tightening liquidity results from their fast expansion. "They can't rely on government monetary policies to help them solve the problem," he told the Global Times on Wednesday.

Xi noted that the government would consider RRRs cuts only when the domestic economy slows down to a great extent. "But currently the domestic economy is showing signs of improvement, therefore the government has no need to roll out stimulus policies," he said.

Liu Xuezhi, a senior analyst at Bank of Communications, agreed, arguing that the market is not short of capital, as loans to real economy enterprises have increased recently.

Yuan-denominated loans issued by banks reached 115.4 trillion yuan by the end of July, up 13.2 percent year-on-year, data from the PBOC showed.

"Besides, the government has made a lot of deleveraging efforts this year, but an RRR cut increases leveraging risks as it pumps liquidity into the markets. I don't think the government wants to bear those risks," Liu said.

Appreciation to halt

According to Liu, although an appreciating yuan does provide room for monetary policy stimulus, the yuan is unlikely to maintain the appreciating trend for a very long time.

"The yuan's recent appreciation is a correction from a long-term depreciation trend since mid-2015," Liu told the Global Times on Wednesday.

The yuan's central parity exchange rate against the U.S. dollar reached 6.5311 on Wednesday, up 59 basis points compared with the previous trading day. The yuan's reference rate has been rising for eight days in a row.

Xi said the yuan's continued appreciation in recent days is connected to speculation on further rise of the yuan.

But Xi predicted that the government wouldn't let the yuan appreciate beyond 6.5 against the U.S. dollar, as a bigger appreciation would hurt the domestic economy.

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