China’s policy maker cuts both benchmark interest rates and Required Reserve Ratio (RRR) to aid economy.
The People’s Bank of China (PBoC), the central bank of China, announced that both the one-year deposit and lending rates were drop by 25 basis points to 1.75% and 4.6% respectively on 26 August. In addition, Reserve Requirement Ratio (RRR – the amount of cash that banks must hold as reserves) for all commercial banks nationwide will be cut by another 50 basis points to 18%, effective from 6 September.
The latest RRR cut will release RMB$600 billion liquidity to be partly offset the effect of capital outflows, supporting M2 growth, and constructive to the Chinese banks on lower financing cost in the wake of China’s battered stock market which has slip over 15% and collapsing global shares, bond yields and oil prices.
Goldman Sachs issued a report regarding the PBoC’s measure to cut interest rates by 25 bps and RRR by 50 bps. The broker considered such measure was in line with its full-year expectation.
Goldman Sachs believed the RRR cut could ease the liquidity pressure from capital outflows. The estimated Rmb$600 billion liquidity release from the RRR cut may partly offset the effect of capital outflows, supporting M2 growth and easing recent inter-bank tightening, but not by enough if large foreign exchange outflows continues.
The broker pointed out that the above-mentioned measure is constructive to the Chinese banks on lower financing cost. However, it is expected that the measure will drag down the Chinese banks’ net interest margin and net profit forecast by 0.1%. The measure should pose little impact on their 2015-16E performance.