PBOC cuts RRR by 50bp to support debt-to-equity swap and small enterprises

PBOC on Sunday early evening announced a 50bp RRR cut, to take effect on July 5. The cut is “targeted” in that liquidity released is expected to support debt-to-equity swap and lending to small enterprises. But most banks will benefit, and total liquidity released will be about RMB 700bn. The size of the cut is in line with our expectation.

The RRR cut was largely foretold by the State Council’s statement last week that targeted RRR cuts would be used to support small enterprises (and to some extent by Governor Yi Gang’s even earlier comment to a similar effect). The timing is noteworthy as it followed a week of weak domestic equity market performance. And the Sunday announcement of the cut (as opposed to say late Friday, when sometimes key regulatory decisions are released) may be partly intended to generate bigger positive impact on market sentiment before trading resumes on Monday.

A very wide set of banks will benefit (the same set that was covered in the last RRR cut in mid-April), with about RMB 700bn in liquidity to be released. Twelve large banks including the big five state banks will have a combined RMB 500bn freed up. These banks are expected to use the liquidity to support debt-to-equity swaps (converting loans to equity stakes in companies), and they will need to report the progress to the regulator on quarterly basis. In addition, Postal Savings Bank and smaller banks (city banks, rural banks, etc.) will have RMB 200bn released from the cut, and they are expected to use the liquidity to boost lending to small enterprises.

The size and the broad timing of the RRR reduction are in line with our expectation . We continue to expect the PBOC to adjust policy stance as needed to cushion domestic growth slowdown and any materialization of trade frictions.