China's central bank has announced a reduction in its legal reserve requirement for some of the country's main financial institutions, but some economists believed that would only partially offset the tighter financial conditions resulting from Beijing's increased macro-prudential measures.
Effective 25 April, the portion of their capital that lenders will be asked to keep on deposit with the central bank would be cut by 100 basis points to 15% or 17%.
The People's Bank of China said the move, which would apply to large commercial banks, joint-stock banks, city commercial banks, rural commercial banks, and foreign banks was meant to relieve pressure on small and medium-sized firms.
It was also aimed at helping banks repay Medium-Term Lending Facility loans.
Tuesday's move came close on the heels of a temporary reduction in the RRR in February, around the Lunar New Year holidays, and a cut at the end of 2017 targeted at smaller lenders.
Were it not for the so-called macro-prudential measures that were in place, combined both sets of moves would equate to a loosening in policy.
But not this time around, said Freya Beamish at Pantheon Macroeconomics, who said it amounted to making the end-2017 cut permanent, while providing further liquidity on top.
“This reinforces our impression that the authorities are set on squeezing shadow banking activities through macroprudential measures, whilst easing the pressure on the conventional banking system,” Beamish said.
“[…] Overall, we judge China's monetary conditions to be tightening sharply. We reckon the authorities will have to start loosening the macroprudential stance in the second half.”