BOFIT Viikkokatsaus / BOFIT Weekly 2018/16

The People's Bank of China cut its reserve requirement ratio (RRR) for small and mid-sized banks from 15 % to 14 %, and for large banks from 17 % to 16 %. The changes will enter into force next Wednesday (Apr. 25). Banks should use most of the freed-up cash to pay back their maturing medium-term lending facility (MLF) loans to the PBoC. Thus, the drop in the RRR should only mildly affect the situation in the money markets. Nevertheless, the move supports banks' profitability by allowing them to pay back their MLF loans (the current rate on new one-year MLF issues is 3.3 %) from their reserves which carry a lower interest rate (1.6 %).

A total of 891 billion yuan ($140 billion) in MLF loans will come due by the beginning of June. The central bank this year has granted 1.591 trillion yuan in new one-year MLF loans to commercial banks. In contrast, the use of the PBoC's short-term lending facility (SLF loans), which banks use to meet their short-term (1–30 days) borrowing needs, has been depressed compared to last year. The PBoC also regulates banking sector liquidity with its open market operations. As a result of these operations, about 800 billion yuan in liquidity has been mopped up from the markets this year. Moreover, the PBoC supports the liquidity of the financial system by providing pledged supplementary lending (PSL loans) to its policy banks. At the end of March, the stock of PSL loans was nearly 3 trillion yuan; a net gain this year of 304 billion yuan.

Determining China's actual monetary policy stance is difficult. The use of interest rates in guiding policy has yet to gain the same status in China as in advanced economies. Interest rates offered on financing to commercial banks through the PBoC's open market operations and lending programmes (MLF and SLF) were boosted a token 5 basis points in response to the last two US rate hikes.