China cuts banks' reserve requirements
Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing, Aug 3, 2018. [Photo/VCG]
The People's Bank of China, the country's central bank, announced on Sunday that it would cut the reserve requirement ratio for commercial banks by 1 percentage point, effective from Oct 15.
The RRR cut will inject a net 750 billion yuan ($109.2 billion) in cash into the banking system by releasing a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of that to offset maturing medium-term lending facility (MLF) loans.
Economists predicted further cuts ahead, and the next RRR cut would come early next year or before the Spring Festival.
Overall, the RRR cut will effectively offset investors' anxiety during the holiday, such as slumps in Hong Kong shares and reduced market panic, said Huang Hanbin, a popular commentator on economics.
However, after the RRR cut, there will be no new positive news in the short term, the market is expected experience a small rebound, then extend its current trend. Investors should not be overly optimistic, Huang added.
China's major stock indices ended lower Monday, with the benchmark Shanghai Composite Index down 3.72 percent to finish at 2,716.51 points. The Shenzhen Component Index lost 4.05 percent to end at 8,060.83 points.
The RRR cut will optimize liquidity structure, said Shen Juan, an analyst at Huatai Finance. The 450 billion yuan used to pay back the medium-term lending facility will help banks reduce the cost of debt, while the incremental capital of 750 billion yuan that will be injected into the market to support small, micro and private enterprises will help banks increase their assets income and reduce financing cost of real economy, as well as the credit risk pressure of bank portfolios.
Furthermore, the evaluation of financial sector shares, especially bank shares, which is at the bottom of evaluation, is expected to rally again, Shen added.
In the short term, the RRR cut will have a limited impact on the bond market, said Zhao Wei, an analyst at Changjiang Securities. During the week-long National Day holiday, US Treasury yields recorded multi-year highs, with the 10-year and 30-year yields hitting seven-year and four-year highs, respectively.
The RRR cut could effectively relieve domestic market sentiment, Zhao said. Meanwhile, high pork prices and oil prices are expected to drive up the inflation expectations, which will further push down the bond market. In the medium and long term, China's bond market will still return to its fundamental, Zhao added.
Yields of China's 10-year central government bonds have been trending lower this year, standing at 3.64 percent at lunch break on Monday.