RRR cuts to ease liquidity conditions

A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, April 3, 2014. [Photo/Agencies]

New steps likely to prevent slowdown in base money growth

The decision of the People's Bank of China to cut reserve requirement ratios for lenders by 50 basis points will help mitigate liquidity risks and prevent a slowdown in base money growth amid increased capital outflows, leading economists said on Thursday.

Wang Tao, chief China economist at Swiss bank UBS AG, estimated that China's net capital outflows exceeded $160 billion in the fourth quarter of last year, accounting for more than half of the total outflows in 2014, as the US dollar continued to strengthen in recent months.

"The People's Bank of China's recent but limited use of medium-term lending facilities was not sufficient to offset such a huge drain on domestic liquidity. In addition, liquidity demand is set to spike as the Lunar New Year approaches, alongside anticipated new initial public offering subscriptions, which will further strain interbank liquidity conditions," she said.

China's capital and financial account posted a deficit of $91.2 billion in the fourth quarter, according to figures released by the State Administration of Foreign Exchange on Tuesday.

Ma Jun, chief economist of the PBOC's research bureau, said: "As the central bank has withdrawn from regular intervention in the foreign exchange market, the yuan funds outstanding for foreign exchange are no longer a major channel of injecting long-term liquidity into the financial system. Under such circumstances, it is necessary to cut the RRR, along with the application of other monetary policy tools, to maintain reasonable growth of broad money supply and adequate liquidity to ensure a steady increase of credit and total social financing."

Deepening economic slowdown and disinflationary pressure are also among the reasons cited by economists for the RRR cut.