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The People’s Bank of China has made two policy moves “in response to another steep overnight slide in mainland Chinese equity indices that were down another 7% overnight,” writes Derek Holt of Scotiabank in a morning note.

China will cut its reserve requirement ratio (RRR) — the amount banks must hold in reserve — by 50 bps for all commercial banks to 18%. Rural banks will get another 50 bps cut. “This is the third RRR cut this year,” says Holt, “and will probably be effective at supporting both liquidity and growth by liberating additional bank funds for other purposes.”

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The country also cut lending and deposit rates by by 25 bps to 4.6% and 1.75%, respectively, which is its fifth interest rate cut since China’s easing cycle began. At the same time, the central bank also eliminated the ceiling on most bank deposits, which Holt cautions could cause turmoil. “While banks will still have a benchmark with which to guide their deposit rate, they will have significantly more freedom [since the ceiling is gone]. One important risk is that, in an effort to attract depositors, larger banks may offer higher rates while smaller banks struggle to compete. The introduction of deposit insurance in May should help shield depositors from any small bank failures, but the transitional period will probably be rocky for some.”

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In an interview yesterday, Mike O’Brien of TD Asset Management cited the PBOC’s lack of action over the weekend as a major reason for Monday’s sell-off. And, Stephen Lingard of Franklin Templeton Solutions points out China’s growth is still three times higher than that of Western economies. “The nature of their growth is changing; it’s not as commodity-intensive,” he says. And, while markets reacted negatively to poor manufacturing data, “the flipside is that services are growing at a healthy clip.” He adds, “Our base case is not a hard landing.”

For his part, Holt says, “The policy implications are clear: both growth and reform remain important priorities in China.”

Originally published on Advisor.ca

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