Last week’s People’s Bank of China (PBoC) reserve requirement (RRR) hikes are having a restrictive effect on banking activity, economists at Nomura have said.
The central bank raised the RRRs of all desposit-taking banks by 50 basis points (bp), and will withdraw around Rmb360 billion (US$55.5 billion) of liquidity from the banking system when it takes effect on January 20.
“A consequence of sterilising heavy FX intervention is that financial repression in China is intensifying,” said Chi Sun, China economist at Nomura in a research note published today (January 18).
Sun describes financial repression as the notion that a set of government regulations, laws, and other non-market restrictions prevent the financial intermediaries of an economy from functioning at their full capacity.
“The policies that cause financial repression includes interest rate ceilings, liquidity ratio requirements, high bank reserve requirements, capital controls, etc,” Sun said.
The measures are a bid to curb excessive liquidity in the market and also bank lending. Jian Chan, economist at Barclays Capital said there three good reasons for why the RRR hikes have come about when they did.
Firstly, he said that Chinese banks traditionally have a strong lending impulse at the beginning of each year, for reasons including profits and securing better-quality loans given the lending quota system.
“The situation tends to be exacerbated in the first few weeks of the year when there are sometimes large amounts of lending that have passed banks' examination around the previous year-end but could not be extended due to quota restrictions—as in 2010,” Chang said.
Secondly, the desire to lend would have been even stronger for banks and local governments this year because it’s the first year of China’s 12th Five-Year Plan and lucrative infrastructure projects are expected to kick off.
Thirdly, there are large number of PBoC bills and notes set to mature this month and will create significant liquidity, roughly Rmb468 billion. Chang believes these figures require RRR hikes to withdraw that liquidity.
“The lack of demand for PBoC bills, due to their low yield despite rate hike expectations, has made RRR as a more important and preferred monetary policy tool (compared with open market operations) to withdraw liquidity,” she said.