The PBoC have just announced its decision to cut commercial bank reserve ratio by 0.5%, marking a new round of expansionary cycle for China's monetary policy. Renminbi has depreciated drastically in recent days. In December China have suffered from the greatest capital outflow since 1998. I have analyzed before that China has to implement expansionary measures to preempt domestic deflation risks. While the most efficient policy now may be another interest rate cut, succeeding capital outflow would cause intensified systematic risk for the domestic financial market. With the 20% more reserve ratio an unnecessary barrier to multiplying effect, cutting the RR can serve to both release liquidity and maintain relatively stable exchange rate market.
The timing of this policy is special, too. With China's Lunar New Year two weeks ahead, PBoC has greatly boosted market optimism. I also expect another interest rate cut to be announced before or after National People's Congress coming in March, where China's 2015 growth rate target will be determined. Until then, China will join the club of monetary expansion with Eurozone, Canada, Australia and so on with a real ticket in hand.
Thank you for reading and Happy Spring New Year!
Finally into the easing club: PBoC to cut reserve ratio by 0.5%
