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RRR Cuts Unlikely as Reverse Repos Mature
Oct 10,2012 11:55CST
industry news
China's central bank is expected to avoid the need to reduce its reserve requirement ratio for lenders.

Updated: 2012-10-10 ( Xinhua) - China's central bank is expected to avoid the need to reduce its reserve requirement ratio for lenders although the maturity of massive reverse repurchase agreements this month will cause a liquidity shortage.

The People's Bank of China, or PBOC, injected 265 billion yuan ($41.8 billion) into the money market through reverse repo operations on Tuesday, of which 165 billion yuan of securities will mature in seven days.

The latest move and previous operations in September brought the amount of reverse repos due to mature, or the money the PBOC has to drain from the open market, this month to a total of 815 billion yuan.

Funds flowing back to the central bank at such a large scale will lead to tighter market liquidity, but the PBOC is unlikely to resort to RRR cuts due to expectations of an economic recovery and inflation concerns, according to experts.

The PBOC will still prefer reverse repos to RRR cuts in easing money supply as the market effect of reverse repos is more steady and sustained, said Guo Tianyong, a banking researcher at the Central University of Finance and Economics.

The central bank has conducted reverse repos for 15 weeks in a row to inject liquidity into the open market since June, with a record high single-day operation worth 290 billion yuan carried out on Sept 25.

Zhao Qingming, a financial expert with the University of International Business and Economics, said reverse repos will continue to be used frequently.

Zhao believes there is less necessity to ease monetary policy through interest rate and RRR cuts now, as the effect of government stimulus investment will play out and a mild recovery of growth is likely in the fourth quarter.

The PBOC has slashed the RRR twice by 100 basis points altogether this year, leaving the current RRR, or the ratio of deposits banks must keep in reserve, at 20 percent. But the ratio has stayed put after last being cut in May.

Anticipation of further reductions has abated since August after the government fast-tracked investment projects to bolster the softening economy.

With growth hitting a three-year low of 7.6 percent in the second quarter, the Chinese government last month approved dozens of infrastructure projects worth more than 1 trillion yuan to build highways, ports, railways, sewage networks and waste treatment plants.

Fears of refueling inflation and the property market also contributed to authorities' caution over interest rate and RRR tools.

Further interest rate reductions risk accelerating house price rises, which the government has worked to curb through purchase restrictions, property taxes and higher down payment requirements since 2010, according to a report released by the Bank of Communications.

Moreover, as the Chinese currency regains appreciation momentum and trade surplus expands again, an expected rebound in China's yuan funds outstanding for foreign exchange will boost market liquidity and make RRR cuts less necessary, Zhao said.

The amount of yuan funds outstanding for foreign exchange decides the amount of yuan funds that the central bank has to inject to the domestic market, as the yuan remains inconvertible under the capital account.

The funds have been shrinking since July as a result of slowing foreign trade and dropping foreign direct investment amid global economic woes.


RRR cuts unlikely

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