Wednesday, November 23, 2011

China Cuts RRR for Selected Rural Banks by 50bps to 16%

The People's Bank of China reduced the required reserve ratio for selected (20) rural cooperative banks by 50 basis points to 16.00% from 16.50% according to FT/Bloomberg.  The move heralds a possible turn in policy settings in China, and follows previous comments from Chinese Premier, Wen Jiabao, that the Chinese government would "preemptively fine-tune policy at a suitable time and by an appropriate degree".  The move also follows an apparent peak in inflation in China of an annual rate of 6.5% in July this year, dropping to 5.5% in October.  The move also coincided with the release of the preliminary HSBC/Markit PMI which dropped to 48 in November, from 51 in October; also showing weakness in input and output prices, and new orders.

The People's Bank of China last raised the reserve requirements by 50 basis points in June this year to an average 21.50% for large banks, and 19.50% for small banks.  The PBC also adjusted the reserve requirement rules in August, effectively resulting in tightening of about 100bps.  Meanwhile the People's Bank of China last raised the benchmark interest rate 25bps to 6.56% in early July this year.  The Bank for International Settlements recently published a paper on 'China's Evolving Reserve Requirements' which provides an interesting and detailed analysis of the People's Bank of China's use of the required reserve ratio as a tool for monetary policy.


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