PBOC’s Zhou: cutting RRR not a sign of policy easing12 March, 2012, 14:59. Posted by Zarathustra
Tags: Economy, PBOC, Zhou Xiaochuan
Late last year, I have already said that cutting reserve requirement ratio for China should not be seen as much of a monetary easing. Against the backdrop of shrinking trade surplus (and occasional trade deficit, as we saw in February) and possible capital outflow (which has a negative impact on the size of foreign exchange reserve, cutting RRR is very much an action to offset those two factors.
Today, People’s Bank of China governor Zhou Xiaochuan told everyone that cutting RRR is not a sign of easing. Instead he said adjusting RRR is the main tool to “hedge the effect of changes of foreign exchange reserve”. Changing RRR by itself is not indicative of the tightness of monetary policy. With RRR at 20.5% now, many would assume that this means a lot of room for easing. Zhou indeed suggested that there is a lot of room to cut RRR, but as he and I have already mentioned, cutting RRR by itself is not an act of monetary easing, so having a lot of room to cut RRR is different from saying having a lot of room to ease monetary policy.