Chinese central bank's reserve ratio hike no surprise
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Hong Kong-based economic analysts said Monday the hike of the deposit reserve requirement ratio (RRR) by the Chinese central bank fell within market expectations and such a move was part of the monetary authority's ongoing efforts to manage excessive liquidity.
The People's Bank of China (PBOC), the central bank, announced Sunday it will raise RRR for most financial institutions for the third time this year. Most commercial banks will have to raise their deposit reserve requirement ratio by half a percentage point, starting May 10.
It means large financial institutions need to keep 17 percent of their deposits in reserve. While the ratio for the rural credit cooperatives and rural banks would remain unchanged at 13.5 percent, said the PBOC.
This is the third rise in the deposit ratio this year. On Jan. 12 and Feb. 12, the central bank raised the deposit ratio by half a percentage point each time.
Wang Qing, an economist with Morgan Stanley, considered the RRR increase lately as "not a surprise".
"PBOC has seemingly been rather quiet after two RRR hikes earlier this year. However, we observe that PBOC has actually spared no effort to mop up excessive liquidity through open market operation (OMO)," he said in a research note.
In the last two months, the PBOC has frequently resorted to bills issuance to soak up excessive liquidity. It has achieved net capital withdrawal for nearly 10 consecutive weeks since February.
Wang estimated a total amount of 1.1 trillion yuan (161 billion U.S. dollars) in liquidity had been drained by PBOC in the past 10 weeks through OMOs, equivalent to about three hikes of RRR by half a percentage point each time.
Wang Han, another Hong Kong-based analyst with Guotai Junan Securities, said Sunday's PBOC move "came a bit later than expected, while it still met our RRR rise expectation."
Wang estimated that the RRR hike would lock about 300 billion yuan among major Chinese mainland's banks.
Tao Dong, chief regional economist at Credit Suisse Group Credit based in Hong Kong, also said the PBOC move fell within expectation and he estimated 320 billion yuan of liquidity would be locked as a result of the RRR hike.
According to Morgan Stanley's Wang, the RRR hike should be seen as "part of PBOC's ongoing liquidity management effort."
He said the RRR hike is likely to have a stronger impact in the financial market than 0MOs, but it will not affect Chinese banks' capacity to extend loans.
"And the annual loan target (of China's entire banking sector) remains unchanged at 7.5 trillion yuan for this year," Wang said. Earlier this year, the Chinese government set the target of 7.5 trillion yuan of new loans in 2010.
Tao said the RRR hikes this year significantly reduced PBOC's pressure to raise the interest rate, a move that might have an impact against an overall recovery of the Chinese economy.
Wang, with Guotai Junan, expected the Chinese central bank to raise the RRR again sometime in September or October this year to manage excessive liquidity.
He also maintained the RRR hike this time would have only minor impacts on Chinese banks' earnings, since they currently have excess reserves and the yield gap between one year PBOC note and required requirement reserve is not substantial. (One U.S. dollar is equivalent to 6.83 Chinese yuan)
