RRR cut shows focus may be changing from yuan stability to boosting China’s economy

By Hu Weijia Source:Global Times Published: 2016-3-1 0:28:02

It seems Chinese policymakers believe the depreciation pressure on the yuan has eased, given the central bank's announcement Monday of a new cut in banks' reserve requirement ratio (RRR).

The People's Bank of China (PBC) surprised the market on Monday by announcing an RRR cut of 0.5 percentage points starting from March 1. This measure had previously been generally expected by the market, but that was before the central bank pumped liquidity into the interbank market in late January through its open market operations (OMOs), which was seen as reducing the likelihood of an RRR cut at that time.

Both OMOs and RRR cuts can help to ease liquidity shortages, but the option of cutting the RRR generally has a bigger impact on the yuan's exchange rate.

Following the yuan's recent tumble, it is understandable that the central bank in late January chose the option of OMOs to avoid increasing the depreciation pressure on the already embattled yuan.

But Monday's RRR cut suggested there may have been a subtle change in the central bank's policy priorities.

Although some international investors are still concerned about further depreciation of the yuan, there are signs of stabilization in the foreign exchange market. The yuan central parity rate stood at 6.5452 to the US dollar on Monday, appreciating from 6.5646 on January 7, which was the weakest since March 2011.

Chinese Premier Li Keqiang said last week that there is no basis for persistent depreciation of the yuan, according to media reports, underscoring Chinese policymakers' confidence in the outlook for the currency. In this context, the government may shift its focus from stabilizing the exchange rate to boosting the economy.

The RRR cut came after some major data for January showed that the economy was performing worse than expected. For instance, China's overall foreign trade dropped 14.3 percent year-on-year in US dollar terms during the month.

The RRR cut will help in stabilizing the economy and will also send a positive signal to the stock markets. Chinese shares closed lower Monday with the benchmark Shanghai Composite Index falling by 2.86 percent, but the long-awaited RRR cut may give a boost to the mainland markets on Tuesday.

The reduced yuan depreciation pressure means the authorities still retain significant room to loosen policy further, and this is important for China amid a cooling economy. The government may need to further ease monetary policy if the pace of economic slowdown becomes quicker than the policymakers can tolerate.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn

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