China: the Cautious Monetary Easing
October 4, 2012
Asia Economics Flash
Economics Research
China: The cautious monetary easing
Asymmetric use of the RRR
The PBOC has cut the reserve requirement ratio (RRR) only moderately during the recent easing, and instead relied on open market operations to counter the liquidity reduction from dwindling balance of payments surpluses. This contrasts with the aggressive use of RRR hikes during the tightening phase in 2006-2008 and 2010-2011.
Li Cui
+852-2978-0784 li.cui@gs.com Goldman Sachs (Asia) L.L.C.
MK Tang
+852-2978-6634 mk.tang@gs.com Goldman Sachs (Asia) L.L.C.
Consistent with a cautious monetary policy stance
This asymmetric approach has helped ease the quantity of available funding and allow the economy (including local government platforms) to re-leverage, without a substantial further easing of broad funding costs.
Yu Song
+86(10)6627-3111 yu.song@ghsl.cn Beijing Gao Hua Securities Company Limited
Holding the RRR cuts
A number of factors are likely to hold back further RRR cuts. First, monetary policy makers may judge the decline in BOP surpluses as temporary. Second, policy makers may be concerned about inflation and asset price risks. And third, there may be a preference to use more flexible tools such as reverse repo to meet liquidity needs. These suggest that RRR cuts are less likely to be used as an easing tool in coming months.
Yin Zhang
+86(10)6627-3112 yin.zhang@ghsl.cn Beijing Gao Hua Securities Company Limited
What will change it?
RRR’s role as a signaling device sets it apart from other liquidity instruments, and it can be used to boost sentiment if growth is much weaker than expected. Catalysts for RRR cuts could include a sharp slowdown in trade balance or a substantial easing of property prices and inflation concerns.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or
Asia Economics Flash
Economics Research
China: The cautious monetary easing
Asymmetric use of the RRR
The PBOC has cut the reserve requirement ratio (RRR) only moderately during the recent easing, and instead relied on open market operations to counter the liquidity reduction from dwindling balance of payments surpluses. This contrasts with the aggressive use of RRR hikes during the tightening phase in 2006-2008 and 2010-2011.
Li Cui
+852-2978-0784 li.cui@gs.com Goldman Sachs (Asia) L.L.C.
MK Tang
+852-2978-6634 mk.tang@gs.com Goldman Sachs (Asia) L.L.C.
Consistent with a cautious monetary policy stance
This asymmetric approach has helped ease the quantity of available funding and allow the economy (including local government platforms) to re-leverage, without a substantial further easing of broad funding costs.
Yu Song
+86(10)6627-3111 yu.song@ghsl.cn Beijing Gao Hua Securities Company Limited
Holding the RRR cuts
A number of factors are likely to hold back further RRR cuts. First, monetary policy makers may judge the decline in BOP surpluses as temporary. Second, policy makers may be concerned about inflation and asset price risks. And third, there may be a preference to use more flexible tools such as reverse repo to meet liquidity needs. These suggest that RRR cuts are less likely to be used as an easing tool in coming months.
Yin Zhang
+86(10)6627-3112 yin.zhang@ghsl.cn Beijing Gao Hua Securities Company Limited
What will change it?
RRR’s role as a signaling device sets it apart from other liquidity instruments, and it can be used to boost sentiment if growth is much weaker than expected. Catalysts for RRR cuts could include a sharp slowdown in trade balance or a substantial easing of property prices and inflation concerns.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or