"Economists React: China’s ‘Surprise’ Bank Reserve Cut "

From China Real Time:

The People’s Bank of China announced a 0.5 percentage point cut in the capital that bank are required to keep on reserve with the central bank, effective March 1. The measure to cut what is referred to as the RRR frees up an estimated $108 billion worth of funds. Still, the move surprised investors. In recent weeks, central bank officials signaled that they preferred to use open market operations and other targeted, short-term tools rather than relatively high-profile measures such as cutting interest rates or the reserve requirement, which risk weakening the yuan’s value. Here are some economists’ reactions to the latest move, edited for length and style.

China’s cut in required bank reserves underscores the growing tension that will be played out this year between economic restructuring and growth. The cut comes immediately after this weekend’s Group of 20 meeting in Shanghai in which G-20 members endorsed China’s more accommodative stance even as they urged Beijing not to devalue the yuan. This cut seems like it ticks off both of those boxes. –Tim Condon, ING Group

The central bank’s move to lower reserve requirement ratio is a surprise to the market after it injected trillions of yuan liquidity via open market operations. The PBOC previously indicated that it would avoid an RRR cut as it would put further downward pressure on the yuan. But now it went back to its traditional tool as some of these open market operations would mature this week. The easy solution for this is to cut the RRR, which can also help stabilize market expectations. –Larry Hu, Macquarie Capital Ltd.

The move underscores a message that officials have repeated in recent days, including at the G-20 meeting: policymakers still have room to support the economy. This move suggests there is still a bias towards supporting the economy. Also, the explicit mention in the statement of supporting credit growth is significant. For now, the emphasis is on shoring up growth in the near term. Finally, today’s move suggests that the PBOC is more relaxed about capital outflows than a few weeks ago.  –Mark Williams, Capital Economics

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