China hints at more easing with possible reserve ratio cut

Zou made similar public comments in July before the central bank cut the so-called reserve requirement ratio, or RRR, in September. His remarks also come as traders are ramping up bets on more monetary easing this year, as a feeble economic recovery heaps pressure on authorities to cut interest rates and provide ample liquidity.

Policymakers doled out an unprecedented 800 billion yuan ($111 billion) of one-year loans to commercial lenders in mid-December and injected even more short-term cash through open market operations at year-end. The combined effect was equivalent to at least a 50-basis point reserve-ratio cut that’s set to bring the central bank’s balance sheet to another record.

“The PBOC still owes the market a RRR cut despite record-high liquidity injection,” said Neo Wang, managing director for China research at Evercore ISI in New York. The equity market is “in urgent need of good news. We think a 25-basis point cut in RRR is coming soon,” and the bank may also cut medium-term lending and prime rates in the next two weeks.

The CSI 300 benchmark fell 1.3% Monday to close at its lowest since February 2019. The gauge has declined in every session this year to shed over 4%, becoming one of the world’s worst-performing major equity indexes. The Hang Seng China Enterprises Index slid more than 2% to close at the lowest since November 2022, with tech stocks leading the losses.

Chinese government bond yields are at the lowest in nearly four years, while banks are able to raise short-term debt more cheaply in money markets than from the central bank. Signs that the People’s Bank of China is softening its grip on the yuan and a fresh reduction to deposit rates by major commercial lenders also bode well for wagers on further policy easing.

Economists polled by Bloomberg in December forecast a 25-basis point cut to the RRR in the first quarter of 2024.

RRR cuts will free up long-term liquidity for the Chinese economy after it was estimated to release more than 500 billion yuan following the September rate cut, according to the central bank-backed Financial News.

The PBOC will also take measures to prevent funds from clogging and idling while guiding financial institutions to strengthen their liquidity risk management for stable money market operations, according to Zou.