China has decided to lower the reserve requirement ratio or RRR for some of its county level rural commercial banks. This decision was made late yesterday, and has many analysis and investors asking ne question: Is a broader and more aggressive monetary stimulus on the way?
This decision follows the release of softer than anticipated March activity data. Beijing is cutting the amount of cash that county commercial lenders must hold in reserves. They are attempting to increase financial support for the agricultural sector with this move. Beijing did not say by how much they were cutting RRR just that it is an “appropriate” reduction for banks that qualify.
This move to release liquidity into the market is not expected to be significant enough to have any big impact on the economy. This is significant, only because it signals a looser monetary policy from the government. It also suggests that Beijing is more worried about the economic outlook than before. With this said, we expect them to cut the RRR for the entire banking sector by June of this year.
Stimulating the Economy
When you decrease the RRR for the banking system, this tends to act as an economic stimulant. Lenders have more money to make loans with and businesses and consumers have more access to cash. Beijing last cut the reserve requirement in May 2012. It is near the 2011 record of 21.5 percent, as Beijing was pursuing an aggressive monetary tightening program to reign in the housing bubble.
There has been marked improvement with 7 day repo rates as it is at 2.7 percent. This way below the 10 percent level(s) we saw last June. Repo rates are a key gauge of confidence interbank lending. The 10 percent levels that we were seeing was due to a severe liquidity strain in China’s economy. Still the cut in RRR is limited. County level rural banks make up a very small portion of the banking system. This means a cut to the entire system will not happen for another month, at least. We could see some more targeted, limited cuts but the impact on the overall economy will be small.
With all this said, we expect further policy measures to come out in the coming weeks. We could get the RRR cut to the entire system by June and we also expect more accommodative measures until we get more clear signs the economy is on better footing and back on track.
Binary Options Take for the Day
Gold is still above 1300 and Copper is below 3.25. Today’s GDP report from China was encouraging but might not be enough to signal a new increased demand in commodities.
Discussion
What are your thoughts on China? Are we about to get some serious broad based monetary stimulus by June? Sound off in the comments below.