New money supply channels fuel surge in credit
A top Chinese banking official on Wednesday suggested that the country should reduce the reserve requirement ratio (RRR), the amount of cash banks are required to hold as reserves, to help maintain liquidity and ease downward pressure on the yuan against the U.S. dollar.
Apart from a strengthening U.S. dollar, swelling credit resulting from "new money supply channels" is also inflicting pressure on the yuan's exchange rate, Yu Xuejun, an official with the China Banking Regulatory Commission (CBRC), said at a forum in Beijing, according to the official news website china.com.
China should "choose an appropriate time" to lower banks' RRR to increase base money supply, according to Yu, who is also the chairman of the CBRC's Supervisory Board for Key State-owned Financial Institutions.
Yu noted that the country should not rely too much on current channels of money supply, which tend to increase banks' lending.
The People's Bank of China, the country's central bank, has been injecting money into the market through selected financial institutions mainly using two channels: the medium-lending facility (MLF) and pledged supplementary lending (PSL).
At the end of November, money injected through MLF and PSL reached 2.735 trillion yuan (3.23 billion) and 2.011 trillion yuan, according to Yu. "But those facilities will quickly increase the scale of (banks') credit," he said.
Given that the RRR, at 17.5 percent, is too high, there is much scope for cuts, which in turn would help with the yuan's exchange rate, according to Yu.
"The base money released through lowering the RRR will still be mainly used to purchase foreign reserves," Yu said.
"Using the dollar and other currencies as foreign reserves or base money has the function of maintaining the yuan's value," he noted.
The so-called anchor-currency effect is conducive to easing the yuan's depreciating pressure, he added.
Yu's comment came as the yuan continues to depreciate against the dollar, a process that analysts have suggested will persist.
On Wednesday, offshore yuan traded 160 basis points lower against the dollar, touching 6.9741 at one point, the lowest level on record, domestic news portal sina.com reported.
The outlook for the yuan's exchange rate against the dollar is not so bright in 2017. HSBC forecast on Wednesday that the yuan will fall to 7.2 per dollar next year, according to the sina.com report.