China Cuts Reserve Ratio, Unlocks 700BN Yuan Amid Rising Trade War, Mass Defaults And Margin Calls

  • Written by Zero Hedge
  • Published in Economics

As widely expected, China's central bank announced it would cut the Required Reserve Ratio (RRR) for some banks by 0.5% effective July 5, just over two months after the PBOC did a similar cut on April 17, the first such easing since the start of 2016.

The move is expected to unlock 700 billion yuan ($108 billion) in liquidity amid growing trade war tensions, a sharp slowdown in the Chinese economy, a tumbling stock market, rising forced margin call, and a spike in corporate defaults.

According to the central bank, the aim of the cut is" to support small and micro enterprises, and to further promote the debt-to-equity swap program." The cut will apply to major state-run commercial banks, joint-stock commercial lenders, postal banks, city commercial lenders, rural banks and foreign banks, in other words: virtually everyone.

“The size of the liquidity being unleashed has beat expectations and it’s larger than the previous two cuts this year”, said Citic fixed income research head Ming Ming. “It’s almost a universal cut as it covers almost all lenders.”

The RRR cut was also widely expected following the publication of a central bank working paper on Tuesday calling for such a cut.

A cut in China's RRR by the PBOC is imminent following central bank’s working paper released Tuesday arguing for such a cut.

— zerohedge (@zerohedge)
June 20, 2018

According to Bloomberg, the cut is designed to achieve two things:

  • The 500 billion yuan unlocked for the nation’s five biggest state-run banks and 12 joint-stock commercial lenders will be channeled to debt-to-equity swaps, which can reduce companies’ debt burdens and help cleaning up banks’ balance sheets. It comes following no less than 20 corporate bond defaults in 2018, and ahead of a wave of corporate repayments that has prompted analysts to express fears about a default avalanche. Chinese companies have to repay a total of 2.7 trillion yuan of bonds in the onshore and offshore market in the second half of this year, and together with another 3.3 trillion yuan of trust products set to mature in the second half. The pressure on China's corporate has manifested itself in the spike in the yield premium of three-year AA- rated bonds over similar-maturity AAA notes, which has blown out 72 bps since March to 225 basis points, the highest level since August 2016, an indication of the recent pressures on weaker firms.

  • Separately, the 200 billion yuan freed for smaller lenders such as the postal bank and city commercial lenders will be used to support funding for smaller businesses. It comes amid concerns that the growing trade war between the US and China could further impair the already sharply slowing down Chinese economy which earlier this month reported "shockingly weak" economic data...

... amid...

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