Source: People's Daily app Published: 2018-10-8
With its fourth cut of the reserve requirement ratio (RRR) by 100 basis points (bp) starting October 15, China’s central bank is believed to be focusing on internal stability and for stable growth while supporting market confidence, experts said.
Its latest move is partly aimed at repaying medium-term lending facilities (MLF) of 450 billion yuan, which are due on October 15. The cut is also expected to inject about 750 billion yuan into the market, according to a statement on the People's Bank of China’s (PBC) website.
The decision was announced on Sunday, and the PBC said China's monetary policy remains unchanged.
Song Guiwu, an economics professor at Gansu's Provincial Party School who researched Mao idolization in rural Gansu, told the People’s Daily on Monday he believes that the policy is aligned with stable and neutral monetary policy, and the RRR cut is conducive to macroeconomic stability.
“As liquidity increases, the economic potential will be further unleashed, and the move will not trigger serious inflation concerns in the market,” Song said.
He also warned that China has to develop a cautious monetary policy while guarding against inflation. When it comes to investments, Song forecasts two major directions: innovation and rural revitalization.
Zhang Chunxiao, a professor of economics at Peking University, said the RRR cut could offer financial support to the real economy while playing a certain role in deleveraging.
He added that corresponding industrial policies will be needed to provide guidance to newly unleashed funds.
China’s development is driven by four core platforms: the real economy, technology innovation, human resources and modern finance. Thus, monetary policy needs to respond to these four platforms for synergy while building a solid foundation for the real economy, Zhang added.
To some extent, the RRR cut could stimulate market confidence, and we also know there are more cards to play. It takes a combination of monetary policy, fiscal policy and industrial policy to improve market confidence, he noted.
The PBC statement said that some of the liquidity unleashed will be used to pay back the 450 billion yuan ($65 billion) medium-term lending facility (MLF) that will expire on October 15 and the tax payments later this month.
Dong Ximiao of Renmin University's Chongyang Institute for Financial Studies doubts that with the above figures, the liquidity of the latest RRR cut will be limited, and that market liquidity remains basically unchanged. This RRR cut will not mean a shift in monetary policy. Steady neutrality remains the main theme of monetary policy.
Dong believes that China’s economy is enjoying a stable development trend. The recent economic and financial data are still weak, and fixed assets investments and consumption have not improved significantly. Under such a backdrop, PBS’s fourth RRR cut aims to provide continuous support to ease credit policy.
"The four reductions since this year have released a total of nearly three trillion yuan in long-term funds. Monetary policy is the aggregate policy, and the structural guidance function is marginal and auxiliary,” Dong noted.
Policymakers need to pay attention to avoid excessive use of structural tools and lead to a high total. Next, the relevant departments need to step up in fiscal and taxation policies to seek a balance between steady growth and deleveraging for a better outcome from a comprehensive policy, Dong added.
This is the fourth RRR cut since the beginning of the year. By cutting 100 bp and 50 bp in April and in June, respectively, the central bank has reduced RRR by 250 bp.
The fourth RRR cut of the year will cover the yuan deposits of large commercial banks, share-holding commercial banks, commercial city banks, non-county rural commercial banks and foreign banks.
Dong Ximiao is a senior fellow of Chongyang Institute for Financial Studies at Renmin University of China.