China: PBoC reduces the RRR – UOB

Ho Woei Chen, Economist at UOB Group, reviews the recent move by the PBoC.

Key Takeaways

“The People’s Bank of China (PBoC) announced on Fri (25 Nov) that it will lower banks’ reserve requirement ratio (RRR) by 25 bps, effective from 5 Dec. This is the second RRR cut this year.”

“Coming on the back of the 16-point rescue package for the real estate market, the RRR cut was not unexpected and could contribute to the additional credit support to the country’s developers by reducing the amount of reserves that banks need to hold. It is estimated to release CNY500 bn of long-term liquidity into the system while banks have pledged at least CNY925 bn since the announcement.”

“The PBoC is likely not done with its monetary policy easing yet, as we see possibility of another cut to the RRR and/or the interest rate in 1Q23. We now expect the 1Y LPR to fall to 3.55% by end-1Q23 from current 3.65% and the 5Y LPR to 4.20% from current 4.30%.”

“Given increasing headwinds facing the economy, we expect 4Q22 GDP at 3.9%y/y (instead of our earlier forecast of 4.5%). The main source of uncertainty is the current surge in COVID-19 infections and spreading anti-lockdown protests that are unprecedented in China. We are keeping our full-year GDP forecast for 2022 at 3.3% for now, after incorporating the stronger than expected 3Q22 data.”

“We are also maintaining our 2023 GDP forecast for China at 4.8% as we anticipate further gradual easing of its COVID-19 measures next year as well as flow-through of the stimulus measures to be positive for the economy.”