[NEW YORK] Global lenders such as JPMorgan Chase expect China to deliver its long-awaited monetary stimulus as early as in April, with timing likely dictated by the double threat of US tariff hikes and a seasonal cash shortage.
Economists are almost unanimously that the People’s Bank of China (PBOC) will cut the reserve requirement ratio (RRR) in the second quarter, according to the latest Bloomberg poll, a decision that would unshackle hundreds of billions of yuan for lending and investing. It’s one of several tools available for officials to pump up liquidity in the weeks ahead.
Policy is near a turning point before an Apr 1 deadline for the US to review Beijing’s compliance with the so-called Phase One trade deal struck during Donald Trump’s first term. The following day, the US president plans to impose sweeping reciprocal duties on trading partners around the world, which is among the expected announcements that could lead to potential tariff hikes on China.
“If the tariffs announced on Apr 2 are quite large, it will be necessary for monetary policy to stabilise market sentiment and offset worries over the economy,” said Qin Yong, chief economist at the treasury department of Sumitomo Mitsui Banking Corporation (China) Limited. “April could be a good window for an RRR cut.”
A reduction in the amount of cash lenders must keep in reserve would be the first such move since September. Analysts at banks including JPMorgan and Macquarie are among the majority predicting a decrease of 50 basis points this quarter.
Control over the RRR is one of the most potent tools in the PBOC’s arsenal, meaning a cut would send a strong easing signal that indicates a readiness to help the economy weather US tariffs.
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It would also mark a shift in the central bank’s relatively hawkish approach to managing liquidity since the beginning of this year – an attitude motivated by its heightened focus on defending the yuan and efforts to curb speculation in the bond market.
But that rationale may now be changing. Besides the risk of further levies on Chinese exports, the PBOC is also having to contend with rising market demand for financing, as strong government bond sales soak up cash and a wall of central bank loans mature this month.
In April, at least 1.8 trillion yuan (S$333 billion) of outright reverse repo and medium-term lending facility loans are coming due, which will withdraw funds from the financial system. Net government bond issuance could reach one trillion yuan, according to Cinda Securities, in what would be a record high for the month of April.
As part of an effort to maintain the flow of liquidity, the PBOC announced on Monday it sold 800 billion yuan worth of outright reverse repo contracts in March. That exceeded the amount that matured during the month, resulting in a net injection of 100 billion yuan, according to Bloomberg calculations.
More pressure may come during the peak of the corporate tax payment season this month, when demand for cash is typically at its highest.
Still, the timing of any move will hinge on the PBOC’s assessment of China’s economy and the possibility of a more aggressive round of easing by the US Federal Reserve this year.
Despite signs of resilience in Chinese consumption, investment and production, industrial profits contracted at the start of the year and consumer inflation dropped far more than forecast to fall below zero. Expectations for future business in the manufacturing industry weakened for a second month in March to the lowest level this year.
While markets have been anticipating an RRR cut since the final months of 2024, the PBOC has instead leaned on tools such as outright reverse repurchase agreements that carry a weaker signalling effect.
As a result, it’s allowed a rise in market borrowing costs and government bond yields that alleviated downward pressure on the Chinese currency.
“Tight liquidity has not really created big problems right now and they can afford to hold on a little longer until there is more clarity on trade and when the Fed eases further,” said Michelle Lam, Greater China economist at Societe Generale.
Absent an RRR tweak, other options for adding liquidity include the resumption of the central bank’s purchases of government bonds, which have been on pause since mid-January.
For now, lowering the RRR is more likely than an outright decrease of interest rates, which risks more depreciation pressure for the yuan, according to analysts.
The consensus forecast is for a 10-basis-point cut in the policy rate of the seven-day reverse repo to take place in the second quarter, according to Bloomberg’s survey.
“An RRR cut is more likely than a rate cut in China in April, especially if funding costs in the onshore market continue to surge as government bond issuance drains liquidity,” said Nathan Chow, senior economist at DBS Bank (Hong Kong).
Looking ahead, cash conditions in China are set to remain tight without further liquidity support from the PBOC. In a sign of increasing demand, the seven-day repo rate, a gauge of funding cost among banks, exceeded 2 per cent to reach the highest since March 2023.
“With bond supply picking up, the PBOC can become more proactive on liquidity injections via a combination of monetary tools,” Nomura Holdings strategists Clair Gao and Albert Leung said in a report. “So watch for a potential resumption of PBOC government bond purchases or an RRR cut.” BLOOMBERG
