(02 January 2020)DAILY MARKET BRIEF 1:China starts off 2020 with RRR cut

The People's Bank of China on the first day of 2020 announced that it would lower banks' required reserve ratio (RRR) by 50bps, effective January 6. The cut is estimated to release CNY 800bn in liquidity as China shores up the slowing economy.

The move would also reduce bank's funding costs by CNY 15bn per year, which will help lower financing costs of the real economy, especially for SMEs and private enterprises, according to UBS Global Research analysts.

"The announcement is not a big surprise to many on the market, as Premier Li just called for cutting the overall RRR and lowering lending rates for SMEs during his visit to Chengdu last week," the analysts said in their latest note.

After the latest RRR cut becomes effective, the standard RRR for big Chinese SOE banks will be 12.5%, while that for medium-sized and small banks will be 10.5% and 7%, respectively.

Some may wonder the timing of the monetary easing as there have been positive progress on the US-China Phase 1 deal and signs of growth stabilization in November last year. However, the analysts believe the downward pressure on the economy remains, and the RRR cut is also meant to partly offset the potential liquidity shortage ahead of the Chinese New Year holiday.

In addition, it also helps to release long-term and low-cost funding to support the scheduled sizable issuance of special local government bonds in January and February. It is reported that local governments would start issuing and deploying special LG bond quota for 2020 worth CNY 1trn soon.

By UBS