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Iris Pang, economist at ING, notes that China’s central bank cut its Reserve Requirement Ratio in the first quarter of 2020 by 0.5 percentage points to 12.5% for bigger banks and 10.5% for smaller lenders, effective from 6 January.

Key Quotes

“This RRR cut will release long-term funding of more than CNY800 billion, as estimated by the PBoC, of which CNY120 billion will come from city commercial banks and rural commercial banks, which serve small and medium-sized enterprises.”

“Whether this RRR cut is too small or too large depends on whether the banks pass on the lower funding costs to borrowers.”

“We think there’s a 50-50 chance of a five basis point cut in the MLF, LPR and 7D reverse repo in January. If there’s no action this month, there’s a higher chance of rate cuts in February and March.”

“With the background of a trade war (even if a phase one deal is signed) and an emerging technology war, China’s corporates need more financing support. As such, we believe that the PBoC could cut the RRR by 0.5 percentage points again in the second quarter. This could be accompanied by another five basis point LPR cut.”

“The USD/CNY exchange rate has moved in tandem with news on the trade war and the emerging technology war. The RRR cut should not have too much impact on the currency pair.”

“Until the trade war worry is gone from a market point of view, we believe the yuan will mostly be moved by developments on this front.”