China’s RRR Cut to Bolster Stock Market Sentiment in Short Run, Analysts Say

(Yicai Global) April 18 – The move by China’s central bank at the end of last week to cut the reserve requirement ratio is likely to give a short-term boost to stock market sentiment, according to analysts, but there is still uncertainty over whether an interest rate cut will follow.

The RRR cut will further enhance market confidence and help the smooth running of the capital market, said Wen Bin, chief researcher at China Minsheng Bank. According to Industrial Securities, the lower ratio should bolster sentiment in the short run. Historically there has generally been an upward trend in stocks in the week after a cut, the brokerage noted.

The People’s Bank of China announced a 25 basis point reduction in the RRR, or the amount of cash banks must hold in reserve, effective from April 25.

Urban commercial banks with no cross-provincial business and rural commercial banks with an RRR above 5 percent will receive an additional 25 bips cut. The weighted average RRR of financial institutions will reach 8.1 percent after the cut.

The move will release about CNY530 billion (USD83.2 billion) in long-term liquidity, enabling banks to support micro, small and mid-sized companies as well as sectors that have been heavily impacted by the Covid-19 pandemic, a PBOC official said, adding that there is currently sufficient liquidity.

The State Council’s financial stability and development committee recently held a special meeting on stabilizing expectations and the market, which was also effective in shortening up market sentiment, according to Wen.

But analysts are split over whether this RRR cut will have a bearing on any future lowering of interest rates.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said it does not mean there will not be an interest rate cut. Given the current downturn in the real estate sector and the impact of Covid-19 flareups, lower rates could play a more important role in supporting the realty market and reducing borrowing costs, Wang said.

China Merchants Fund also said an interest rate cut could come following the RRR move, based on recent comments from policymakers.

But Shenwan Hongyuan Securities said the PBOC hopes the RRR cut will help support the real economy, adding that the likelihood of an interest rate cut this year is low.

Editors: Xu Wei, Tom Litting

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