China Cuts Bank Reserve Requirement Ratio Amid Capital Outflows

China’s central bank announced this evening that it will cut the reserve requirement ratio (RRR) by 50 basis points, effective tomorrow on 1 March 2016.

The RRR cut came amid the recent capital outflow and soft economy, and will immediately inject about RMB650 billion (US$99 billion)into the banking system, alleviating the liquidity drain, says a research note by ANZ AG.


The move will take the RRR ratio to 17% for the biggest banks, still one of the highest such ratios in the world.

China’s foreign exchange reserves had fallen sharply by US$99 billion in January, suggesting that the country experienced a large amount of capital outflow during the month despite a record trade surplus of US$63.3 billion.

Capital outflow pressures may persist in 2016 on the back of RMB depreciation expectations and the commencement of the U.S. Fed’s policy rate normalization.

Thus, ANZ expects that the People’s Bank of China (PBoC) may further lower the RRR in 2016, depending on the actual situation of the capital flows.

As inflation will remain low this year, China will continue to lower interest rates. However, the PBoC will remain cautious about lowering the benchmark lending and deposit rates, given the current RMB depreciation pressure.

Lowering the benchmark interest rates could exacerbate the depreciation expectations. As PBoC governor Zhou Xiaochuan signaled during the G20 meetings in Shanghai over the weekend, China will continue to experiment with the interest rate corridor system.

Tools such as Standing Lending Facility (SLF), Medium-term Lending Facility (MLF) and Pledged Supplementary Lending (PSL) will be used more frequently to guide market interest rates lower, ANZ forecasts.

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