Goldman Sachs Group Inc economists say they no longer expect China to cut the amount of cash banks must hold in reserve this year after the central bank pledged to keep overall liquidity conditions relatively stable.
The probability of a cut in the reserve requirement ratio is lowered, and the People’s Bank of China (PBOC) might rely on open market operations, its medium-term lending facility and targeted tools instead to keep liquidity supply and demand relatively stable, Goldman economists including Maggie Wei and Hui Shan said in a report.
Targeted tools is likely to refer to the PBOC’s “green” liquidity support tool for reducing carbon emissions, they said.
“Given the large amount of maturing medium-term lending facility (MLF) in the rest of the year, an RRR cut might serve as a tool to replace MLF and thus has little net impact on overall liquidity,” they said. “Amid tight regulations on property financing, shadow banking, and local government borrowing, as well as increased supervision on anti-corruption, credit demand has remained soft.”
At a news briefing, the central bank vowed to use all kinds of policy tools to keep liquidity reasonably ample. It broke its silence on the debt crisis at China Evergrande Group, saying systemic risks from the developer’s struggles are “controllable” and unlikely to spread.
China’s credit growth slowed in September as weakness in the property market amid the Evergrande crisis weighed on financing and lending, despite the central bank’s call to stabilise credit expansion.
Aggregate financing was 2.9 trillion yuan ($450 billion), compared to 2.96 trillion yuan in August and 3.47 trillion yuan in September last year. Overall total social financing growth in October and November might accelerate moderately, the economists said, with more than 1 trillion yuan of government bonds scheduled to be issued in both months.
China’s yields jump to 3-month high as easing bets dwindle
China’s 10-year bond yield rose to the highest in three months as comments from central bank officials prompted traders to roll back some policy easing bets.
The yield on China’s 10-year bond rose as high as 3.05%, crossing the 3% level for the first time since early July. Bond futures fell by the most in two months. Sun Guofeng, head of the monetary policy department at the People’s Bank of China, said authorities will use medium and short-term tools to manage liquidity, without mentioning the possibility of a reduction in lenders’ reserve requirement ratio.
“China government bond yields rose due to weakening market conviction on reserve requirement ratio cuts,” said Kiyong Seong, a strategist at Societe Generale in Hong Kong. The nation’s eroding fundamentals may sustain a possibility of RRR cut or ample liquidity provision, he said.