Liquidity allocation more crucial than RRR cut

By Dong Ximiao Source:Global Times Published: 2019/12/30 23:01:32

Dong Ximiao

There is a possibility that the People's Bank of China (PBC) will cut the reserve requirement ratio (RRR) in January. The possible RRR cut could be similar to the last time in September - overall cut combined with targeted cuts. 

There are two reasons for choosing January. One is to keep adequate liquidity around the Chinese Lunar New Year, and the second is that banks prefer to inject liquidity into the market in the first half, or at the beginning of a year, so as to make more profits.

The overnight Shanghai Interbank Offered Rate (Shibor) dropped below 1 percent on December 25 and 26, which shows sufficient liquidity. However, small and medium-sized banks are still in need because the country has structural problems regarding the liquidity allocation. A RRR cut, especially the targeted RRR cut, can help bring down the cost of funding in small and medium-sized banks. But improving those banks' capability to serve the micro, small- and medium-sized enterprises is more pressing. 

The monetary policy in 2020 should keep a prudent trend, greater countercyclical adjustment as well as flexible and moderate liquidity by seeking balance among multiple goals such as stable growth, adjust structure and risk preventions. 

Aside from a RRR cut, the PBC may be more willing to adopt tools like reverse repos, a targeted medium-term lending facility to release liquidity. China will not turn to quantitative easing like European countries and the US. 

Currently, the most important thing is a structural adjustment to channel more liquidity to small and medium-sized banks and unclog the monetary policy transmission mechanism. Therefore, the newly released liquidity can be better reallocated in the market. 

Moreover, the PBC said recently it will use the loan prime rate (LPR) as a new benchmark for pricing existing floating-rate loans. As long as the LPR is adopted more prevalently as a pricing benchmark, the old interest ratesystem will weaken. To lower borrowing costs in the real economy, the PBC seems to prefer a more market-oriented LPR than interest rate cuts. 

The monetary policy in 2020 will not be strongly related to the consumer price index (CPI), which is likely to be high for the first half of the year. Since this round of a high CPI is mainly associated to surging pork prices, not inflation in general, the monetary policy can only exert limited impact on the CPI. 

The author is the chief analyst with Zhongguancun Internet Finance Institute; distinguished research fellow with the National Institution for Finance and Development. 


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