Early Friday, China's central bank surprised by announcing an unexpected cut to the amount that banks set aside for deposits by 25 basis points, vowing to keep ample liquidity in the interbank system and better fund the real economy.
The People's Bank of China reduced the reserve requirement ratio for almost all banks by 0.25 percentage points, effective from March 27, it said in a statement on Friday.
"The decision by the Chinese central bank to cut reserve requirement ratio signals that authorities are focused on supporting growth, not an indication of any problems in the economy. It could also be meant to give the market a boost after the poor performance in growth stocks this year. I don't feel excited on the news as the main challenge this year is exports, and liquidity isn't going to help much on that front".
"Given that global banks are now on defensive and liquidity is at premium, it make sense for PBOC to start getting ready before real problem arise. Likely Chinese banks have been affected by their bond portfolio losses just like the US bank albeit the impact will be lower but nonetheless still significant since you can't escape US market".
"The global banking crisis, even though it's been stabilized after the major banks injected money into the banking system but still the situation isn't yet over. So we really need some more liquidity in the global financial markets since China is in a different cycle - they've been loosening the policy. And secondly, if you look at the economic data released in February, it didn't provide any surprise to the markets. So maybe Beijing recognizes the pace of the recovery is not as strong as they expected".
The RRR cut is one of the cheapest types of liquidity the People's Bank of China can offer banks because it's not a loan and carries no interest rate The PBOC, which also repeated a pledge to not flood the market with liquidity, is trying to keep borrowing costs low across the economy to aid the recovery from Covid Zero.
Chinese banks are looking relatively resilient right now, as I wrote here.
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