PBOC may cut RRR before the Lunar New Year holiday

January 19, 2025 at 11:34PM
The 2025 Chinese New Year holiday, also known as the Spring Festival, will be on Wednesday, January 29, and last until Tuesday, February 4. It celebrates Lunar New Year.

Chinese media reported last week that the People’s Bank of China may cut its reserve requirement ratio (RRR) prior to the holiday to alleviate the pressure on funding. Reasoning cited included the liquidity gap at the beginning of the year, amongst other seasonal factors.

As an aside on this, I’ve seen other analysis (I’ll dig up the info an post it) suggesting a cut is likely after the new year. Sheesh …. Oh, and adding more ‘sheesh’ I’ve just looked up some previous posts re the RRR and it reminded me there are forecasts of an impending PBOC RRR cut about once a week from some place or other!

Pic via https://chinesenewyear.net/

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The Reserve Requirement Ratio (RRR) is a central bank regulation that sets the minimum amount of reserves each bank must hold in relation to their deposit liabilities. Its the percentage of total deposits that banks are legally required to keep on hand, either as cash in their vaults or in a reserve account at the central bank.

In China, this ratio is set by the People’s Bank of China (PBOC).

By adjusting the RRR, the PBOC can influence the lending capacity of commercial banks. For example, an increase in RRR means that banks have less money to lend out because they have to keep more in reserve. This reduces the money supply in the economy. Conversely, if the PBOC decreases the reserve ratio, banks have more money to lend because they are required to keep less in reserve. This increases the money supply in the economy, which can stimulate economic activity.

This article was written by Eamonn Sheridan at www.forexlive.com.