China's Central Bank to Ensure Liquidity

China’s central bank pledged to ensure adequate availability of cash in the financial system by using tools including reductions in the reserve-requirement ratio, state media reported on April 19.

Authorities will “appropriately take targeted liquidity management actions” based on circumstances including foreign- capital inflows and funding demand, the official Xinhua News Agency said in a report late yesterday on an interview with an unidentified person at the People’s Bank of China. Options include adding cash through reverse-repurchase operations and cutting required reserves, Xinhua said.

“This is a clear ‘open mouth operation’ through which the PBOC sent the market a signal that further loosening measures will be rolled out,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc., said in a research note today. Authorities may lower the reserve-requirement ratio twice more this year, including next month, Zhang said.

The benchmark Shanghai Composite Index fell 0.1 percent at the 11:30 a.m. local-time break.

Lending Surge

The central bank reduced the required-reserves ratio in February for the second time in three months to spur lending. Regulators also eased credit restrictions at three of the nation’s biggest banks, people with knowledge of the matter said last month. The actions helped send new yuan loans last month to the highest level in a year while money supply growth accelerated.

The monetary authority will preemptively adjust and fine- tune policies in a timely and appropriate manner to guide steady and appropriate credit growth and maintain reasonable liquidity in the banking system, Xinhua said, citing the PBOC official.

Joy Yang, chief economist for Greater China at Mirae Asset Securities (HK) Ltd. in Hong Kong, said the Xinhua report is consistent with her forecast for two or three more cuts in the reserve-requirement ratio this year. Tools such as the ratio “are needed to manage a stable liquidity level” relative to economic growth, Yang said.

The central bank will also guide banks to “reasonably” set the pace of lending and will maintain a lower required- reserve ratio for some financial institutions, the report said.

The levels for rural credit cooperatives and rural cooperative banks will continue to be kept 6 percentage points and 5.5 percentage points lower, respectively, than the ratio at larger banks, Xinhua cited the official as saying. The current ratio for the biggest banks is 20.5 percent.