Investors reduce bets for pre-holiday China reserve ratio cut

SHANGHAI, Jan 14 (Reuters) – Investors in China’s money markets are scaling back bets for a cut to banks’ reserve requirements before next month’s Lunar New Year holiday, reflecting a belief that authorities will avoid strong easing signals in the midst of an economic recovery.

The People’s Bank of China (PBOC) delivered reserve requirement ratio (RRR) cuts before the week-long holiday in 2019 and 2020 to boost banking system liquidity.

The festivities, which start on Feb. 11 this year, traditionally see surging cash demand as households splurge on gifts and celebrations, and companies pay bonuses.

But as China steadily rebounds from coronavirus disruptions in 2020, RRR cuts are “neither necessary nor sensible,” said Lu Ting, Nomura’s chief China economist.

“Both the high current account surplus and strong capital inflows are replenishing base money, while the PBOC can use other low-key channels such as the medium-term lending facility (MLF) to add liquidity if necessary.”

MLF loans worth 300 billion yuan ($46.37 billion) mature on Friday, and markets are paying close attention to how much fresh money the central bank will offer.

Apart from cash injections, several money market traders said the PBOC could revive the contingent reserve arrangement (CRA), introduced before the holiday in 2018, which lets banks dip into reserves to make up for liquidity shortfalls.

Song Xuetao, economist at Tianfeng Securities, expects a seasonal rise in cash demand of 1.6 to 1.8 trillion yuan ahead of the holiday.

Expectations that the PBOC may prefer smaller liquidity fixes over more easing have strengthened since recent top policy meetings indicating scaled-back central bank support for the economy this year. Authorities have signalled wanting to avoid sudden policy shifts and to keep economic growth within a “reasonable range”.

Markets have also begun pricing in a regulatory tightening bias following new bank lending figures that showed a drop in December from the previous month. Beijing also introduced caps last month on banks’ property loan exposure effective Jan. 1.

The PBOC’s lighter touch is reflected in open market operations, traders said, where daily injections have been minimal. On Wednesday and Thursday, the central bank injected 2 billion yuan via seven-day reverse repos on each day.

Benchmark Chinese 10-year Treasury futures were up 0.17% on Thursday.

“With China’s growth expected to recover strongly in 2021, the PBOC is shifting policy focus more towards controlling risk and leverage, and we expect further monetary and credit policy normalization or tightening, not a sharp turnaround,” said Wang Tao, chief China economist at UBS.

$1 = 6.4700 Chinese yuan Reporting by Winni Zhou and Andrew Galbraith; Editing by Kim Coghill