China’s monetary policy: where it stands now

After yesterday’s announcement of cutting reserve requirement ratio, where things stands now in terms of China’s monetary policy?

After the cut in reserve requirement ratio, the RRR for large institution will be at 20%. To give you an idea of how much more the PBOC can cut in terms of the reserve requirement ratio, the ratio was at 6.0% from 1999 to 2003 after the Asian financial crisis when China was going through a period of deflation. RRR is also a tool for the Chinese central bank to sterilise capital inflow, with capital inflow slowing and reversing (as it happened late last year), the PBOC could potentially cut RRR back to single digit, in my view. Note that cutting RRR by itself does not necessarily mean monetary easing, and it may or may not translate to faster loan growth going forward.

Source: People’s Bank of China

The chart below shows historical RRR overlay with monthly new loans.

Source: People’s Bank of China

And the chart below shows money supply growth and RRR.

Source: People’s Bank of China

In terms of interest rates, lending rate for 1-3-year loans is set at 6.65%, and 1-year fixed deposit is set at 3.5%. There will be, I believe, some room to cut interest rates, particularly on the lending side, if promoting faster loan growth is the key objective for the central bank.

Source: People’s Bank of China

And currently, with inflation at 3.4% yoy, the 1-year fixed deposit rate in real term has once again returned to positive territory. With the economy slowing and (I believe) possible deflation, real interest rate could turn more positive.

Source: People’s Bank of China

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.