[ET Net News Agency, 2 May 2018] UBS Global Research said the People's Bank of China's
(PBoC) 100bp cut in the required reserve ratio (RRR) 25 April could be the beginning of
normalisation of the cenrtal bank's liquidity operation.
The research house believes more RRR cuts could come in order to unwind the legacy
sterilisation liquidity operations. UBS expects up to 200bps of additional RRR cuts in
2018.
UBS thinks RRR cuts will be an alternative instrument for the PBoC to manage liquidity
in the banking system. Against a backdrop of macro deleveraging and a clampdown on shadow
banking, it expects off-balance-sheet financing growth to continue to slow, while bank
loans may pick up the slack if broad credit slides too rapidly due to overtightening, in
which case RRR cuts could be used to help meet demand for additional market liquidity as
M2 growth rebounds.
Meanwhile, UBS believes RRR cuts alone are not a strong signal of looser monetary policy
ahead, as the PBoC has now accumulated around Rmb10trn in outstanding proactive liquidity
operations on its asset side, which could readily be used to neutralise extra liquidity
released by RRR cuts.
UBS believes more RRR cuts should largely be positive for China banks as they are
accretive to the banks' NIMs. It estimated a cumulative 500bps in RRR cuts could boost
banks' NIM by 9-13bp, equivalent to a 6-13% tailwind to profits. Banks with higher
proportion of deposits, higher asset yield, and more outstanding MLF borrowings are likely
to benefit more than peers. (KL)