Latest News:  
Beijing   Overcast/Cloudy    29 / 17 ℃  City Forecast

Home>>China Business

RRR cut still in country’s best economic interest

By Yu Fenghui (Global Times)

08:15, May 09, 2012

Recently, an argument has been put forward that, with yuan funds outstanding for foreign exchange on the rise and the recent issuance of reverse repurchase agreements by the People's Bank of China (PBC), the country's central bank, another cut in banks' reserve requirement ratio (RRR) will not be necessary to stimulate the nation's slowing economy.

In March, the total balance of the yuan fund outstanding for foreign exchange - that is, yuan issued by the central bank to buy foreign currency that flows into the country - stood at 25.6 trillion yuan ($4.05 trillion), up 125 billion yuan from February, according to statistics released by the central bank on April 24. This increase in March was more than five times higher than gains seen in the previous month. Also, last week, the PBC offered 65 billion yuan ($10.4 billion) of seven-day reverse repurchase agreements to select banks.

With the capital from these two channels, plus an additional 250 billion yuan worth of bills and repos due to reach maturity in May, the market stands to see a total injection of 440 billion yuan by the end of this month - far more than a 0.5 percent RRR cut could offer, many are claiming.

While it might not seem necessary in the short term, over the long haul China definitely needs another RRR cut to increase liquidity and cope with flagging economic growth.

For one thing, the central bank's reverse repos, which have a short-term maturity period, will only temporarily ease liquidity and cannot replace the long-term benefits of an RRR reduction. Earlier this year, in fact, the PBC slashed the RRR in February, just weeks after offering a round of reverse repos in January, signaling the need for a multi-faceted approach to China's credit woes.

Furthermore, increases in the yuan funds outstanding for foreign exchange will not go far enough to take the pressure off the market's current credit crunch. In the first quarter, yuan funds outstanding for foreign exchange only totaled 289 billion yuan, according to the Xinhua News Agency, down 74 percent compared with the same period last year. Thus, even if the PBC chopped 1 percent off the RRR, which could bring about 800 billion yuan into the market, liquidity would still be tighter than last year.

Making matters worse, growth in the balance of yuan funds outstanding for foreign exchange is also expected to decline in the coming months, as the country's gloomy export outlook batters the yuan's exchange rate.

According to statistics from last week's China Import and Export Fair, also known as the Canton Fair, the largest trade event of its kind in China, the value of the country's export deals for the spring season declined for the first time in nearly three years, dropping 4.8 percent compared with autumn 2011. With 86 percent of the orders inked at the fair being for short-term deals, low buyer confidence and concerns about the health of the world economy are expected to drag down demand for China's exports into the near future.


Leave your comment0 comments

  1. Name


Selections for you

  1. "Story of Dragon" fashion show held in Beijing

  2. Over 1000-year-old Shanggantang Village

  3. Act of bravery spurs act of kindness

  4. China's first deep-water rig to drill in South China Sea

Most Popular


  1. Relax high-tech restrictions
  2. Overseas investment yields not nation's priority
  3. A neutral US helpful to stability in S China Sea
  4. Tourism authority warns of low-cost package tours
  5. Have you felt anxious recently?
  6. Central bank's rise comes at economy’s expense
  7. How to deal with 70,000 boxes of defective Coke?
  8. Foreign airlines optimistic about Chinese market
  9. Stagflation poses real threat to economic growth
  10. EU commissioner looks to increase investment

What's happening in China

Bird's eye view of red tide near Rizhao, Shandong

  1. Beijing may host OTC market
  2. China's online third-party payment booms in Q1
  3. Real estate developers struggle in sea of red ink
  4. Flood leaves 3 dead, 1 missing in NW China
  5. Help for boy who wasn't taught to speak

PD Online Data

  1. Spring Festival
  2. Chinese ethnic odyssey
  3. Yangge in Shaanxi
  4. Gaoqiao in Northern China
  5. The drum dance in Ansai