Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

China's RRReminder that economies remain fragile

EconomyJul 11, 2021 12:05AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. REUTERS/Jason Lee/File Photo

By Marc Jones and Tom Arnold

LONDON (Reuters) -China's decision on Friday to give its economy a 1 trillion yuan ($154 billion) shot in the arm has given investors a reminder that even the largest economies are likely to need the occasional pick-me-up while the coronavirus pandemic lasts.

In one of its trademark Friday night moves, the People's Bank of China (PBOC) cut its reserve requirement ratio (RRR) - the money banks have to park at the central bank for safety - by 50 basis points (bps).

It is the first such step since April last year when COVID was rapidly spreading around the world. Just as significantly, it ends nine months of gradual policy tightening by authorities eager to prevent credit growth getting out of control.

"We believe this marks a shift from countercyclical tightening to an easing bias," analysts at Morgan Stanley (NYSE:MS) said, "in view of the recent growth hiccup amid Covid resurgence, supply chain disruptions, and further moderation in domestic consumption."

UBS's head of emerging market strategy Manik Narain said the move was a fine-tuning rather than a screeching U-turn by the PBOC. Around 400 billion yuan of the 1 trillion the RRR is estimated to be worth is likely to be used to repay existing PBOC 'Medium-term Lending Facility' funding, while 700-750 billion of tax payments are also due soon.

But, from a global perspective, it was a pointed reminder that reeling in COVID support measures isn't going to be a smooth glide for anyone.

"China was first in, first out (with COVID policy support)" Narain said. "So if you are thinking about the global significance, it is possible that the message here is that the PBOC is showing that economies are somewhat fragile and inflation is not likely to be too damaging over the medium term."


The PBOC's move comes amid a rapid re-acceleration of global COVID cases.

At the same time, though, the U.S. Federal Reserve is weighing when to taper its asset purchases and near-zero interest rates it put in place last year and emerging market heavyweights like Brazil, Mexico and Russia are jacking their interest rates up already to address spikes in inflation.

The bond market appears to be responding to the turn in China's rate cycle by pricing in lower interest rates over the medium term. Even prior to the RRR announcement, hints earlier this week that a cut was coming led China’s 10-year government bond yield to post its biggest weekly decline this year.

Many China watchers believe pent-up COVID demand has now peaked and its growth rates will now moderate, weighed down by weakening exports, surging producer price inflation and Beijing's continued crackdown on the property market.

The economy is still expected to grow more than 8% this year, however, against the government's modest growth target of over 6%, suggesting there is no big pressure to step up easing.

"We expect fiscal policy to remain focused on specific sectors most affected by the pandemic like small companies. We also expect macro prudential tightening on the property market to remain in place," said Gustavo Medeiros, deputy head of research at Ashmore Group.

UBS's Narain said another take away from of Friday's move was that other big emerging markets were likely to see it as sign of things to come in their own economies.

"If I am the head of the central bank of Mexico or Brazil and have already been hiking rates, it is also telling me that the (interest rate) hiking cycle is probably going to be shallow."

($1 = 6.4795 Chinese yuan renminbi)

(Additional graphic by Karin StroheckerEditing by Mark Potter)

China's RRReminder that economies remain fragile

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Vlad Lozovskiy
Vlad Lozovskiy Jul 11, 2021 12:39AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Yep.  biden and his team is worthless so let's listen to China
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email