China's PBoC shifts policy stance, cuts RRR by 0.50 percentage points

China's central bank cut the amount of reserves that the country's lenders are forced to keep on reserve, in a move that some saw as a shift towards an easing bias in its policy which ultimately would weaken the currency.

At the weekend, the People's Bank of China reduced its required reserve ratio for almost all banks by 0.50 percentage points, setting it at 15.5% for the largest lenders, effective from 5 July.

In a statement, the monetary authority said the move would release 500bn yuan for debt-to-equity swaps at the five largest banks and 12 joint-stock banks, in a move meant to help clean-up the banking system.

Another 200bn yuan were expected to be released for a group of smaller lenders, so that they could support lending to small and medium-sized enterprises.

Analysts had been anticipating a RRR, although according to Freya Beamish at Pantheon Macroeconomics, the actual size announced was at the high end of what might have been expected.

"[The cut] provides further evidence that the authorities are switching toward an easing bias, though the language used to describe the stance in the statement remains the same," said Beamish.

"Note also that the RRR is so high because the PBoC used to hike the RRR to sterilise the effect of their efforts to hold down the RMB. If they now plan to cut the RRR to continue the debt clean-up, then this ultimately must weaken the RMB."

Nevertheless, for Julian Evans-Pritchard at Capital Economics, concerns about the potential impact from US tariffs was likely only a factor at the margin.

"We've been arguing for a while that efforts to slow credit growth would be cut short given that they will almost certainly result in the economy slowing more than policymakers are comfortable with," he said.

"The latest RRR cut leaves us confident in our forecast (unchanged since December) for a further sizeable decline in interbank rates and bond yields before the year is out."