China’s RRR cut to stimulate loan demand
PBOC cut the RRR. On 6 September, the People’s Bank of China (PBOC) announced a reserve requirement ratio (RRR) cut of 50 bps for all banks effective 16 September, as well as additional targeted cuts of 100 bps – to be applied in two 50-bps cuts on 15 October and 15 November – for selected city commercial banks. The sector-wide RRR cut will release some CNY900b of liquidity into the banking system, equivalent to 1% of China 2018’s gross domestic product (GDP) value. This will also bring the RRR among large banks down to 13%, from 13.5% currently.
Given the inverse correlation between the RRR and loan-to-deposit (LDR), the move will further spur the LDR, which currently stands at 73%. While the net interest margin (NIM) could face downward pressure from the lower lending yield resulting from the latest loan prime rate (LPR) mechanism, the RRR cut will expand bank’s lending capacity because of lower funding costs and potential increases in loan growth. Such an increase in banks’ balance sheet efficiency will also help to support the NIM trend.
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