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22 Apr 2015
China's RRR cut to bring positive long-term effects - Fitch
FXStreet (Mumbai) - International ratings agency Fitch estimates that the People's Bank of China's (PBoC) reserve requirement ratio (RRR) cut effective April 20 will release 1.5 trillion Yuan (USD240 billion) in liquidity, while it will lower borrowing costs and alleviate the debt-servicing burden for both state owned and private companies as well as local governments.
The move will have a moderately positive effect for banks on their net interest margins and earnings, the agency said in a statement.
Fitch said in its statement,
"The decision suggests a more aggressive approach to monetary policy easing by the PBoC compared with the targeted measures in 2014 which focused on lowering borrowing costs only in selected sectors. It also goes beyond replacing liquidity lost through recent capital outflows, “
"a previous 50bp RRR reduction on 5 February only compensated for cross-border capital outflows during 2014."
Chinese authorities have “the capacity to manage this adjustment - through monetary and fiscal policy - without resulting in significant financial or economic instability."
"The RRR cut will also help banks continue the trend to shift credit back on to the balance sheet. Bank loans represented 78% of total new total social financing in 1Q15, up from 60% in 4Q14. Additional bank loans enabled by the RRR cut will allow more debt to be rolled over, though it will only delay and not resolve a rise in NPLs over the medium term."
The move will have a moderately positive effect for banks on their net interest margins and earnings, the agency said in a statement.
Fitch said in its statement,
"The decision suggests a more aggressive approach to monetary policy easing by the PBoC compared with the targeted measures in 2014 which focused on lowering borrowing costs only in selected sectors. It also goes beyond replacing liquidity lost through recent capital outflows, “
"a previous 50bp RRR reduction on 5 February only compensated for cross-border capital outflows during 2014."
Chinese authorities have “the capacity to manage this adjustment - through monetary and fiscal policy - without resulting in significant financial or economic instability."
"The RRR cut will also help banks continue the trend to shift credit back on to the balance sheet. Bank loans represented 78% of total new total social financing in 1Q15, up from 60% in 4Q14. Additional bank loans enabled by the RRR cut will allow more debt to be rolled over, though it will only delay and not resolve a rise in NPLs over the medium term."