People’s Bank of China Forecasts Major Changes to Boost Mainland Economy

The mainland has put long-term funding into the market while taking back short-term funds. Some analysts think that there may be a reduction in the deposit reserve ratio as early as the second quarter.

Last month, new loans reached a record high on the Mainland. To stabilize the economy and enable banks to continue lending, the People’s Bank of China injected longer-term funds and renewed them for three consecutive months. The one-year medium-term lending facility (MLF) was 499 billion yuan, which was more than the amount that matured by nearly 200 billion yuan. However, due to the significant number of seven-day reverse repos that were due, the market regained almost 240 billion yuan in funds in a single day.

There are indications of a tightening of short-term funds, and the bank’s overnight repurchase rate has gone up by more than 36 basis points, nearing 2%. Standard Chartered is of the view that the lending market has become more volatile, and the overall loan growth is slow. At the earliest, next month, the mainland may ease its monetary policy further and inject more liquidity.

Some experts think that the People’s Bank of China’s policy of “reducing the short and releasing the long” suggests that their approach is relaxed and neutral. Fubon Bank’s Director of Investment Strategy and Research, Pan Guoguang, stated that the economy grew more than 4% in the last quarter, and there has been a stronger recovery in the second quarter.

The central bank may not need to loosen its policy much, but it may make some small adjustments, such as the RRR cut to provide commercial banks with more liquidity to lend. While the USD/RMB may reach 6.85 or 6.9, Pan does not see significant risks if it hits 7, as the US dollar is generally expected to increase interest rates a few times before considering reducing rates due to economic slowdowns.

On the other hand, CITIC Securities believes that the authorities have added medium and long-term liquidity and will not reduce the deposit reserve ratio in the near future. They predict that this may occur at the earliest in the second quarter.

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