They have been busy little bees at the People’s Bank of China.
Justin heard about two moves from the Bank:
Regarding the reduction in the required reserve ratio (RRR), this is rather encouraging news on the one hand and rather worrying on the other. On the positive side…but first some information if you need it:
The reserve requirement ratio (RRR) is a central bank regulation that sets the minimum amount of reserves that each bank must hold in relation to its deposits. This is the percentage of total deposits that banks are legally required to keep, 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 because they have to keep more in reserve. This reduces the money supply in the economy.
- Conversely, if the PBOC lowers the reserve ratio, banks will 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 drop is therefore encouraging, banks will have more yuan to lend and constitutes a boost, at the margin, for the economy.
Now let’s move on to the problem. This decision comes the day before China publishes its latest key data, those for the month of August. See screenshot (ICYMI here):
It is somewhat worrying that the PBoC decided to increase its stimulus measures the day before this data was released. Maybe the data… stinks? We will know soon.
On this second article linked above, the one about the bank requesting a suspension of dollar purchases, Justin summed it up well:
- Reportedly, the PBOC has asked some of the major banks to refrain from immediately redressing their market positions and to leave the market open in order to further ease downward pressure on the Chinese yuan.
Sheesh, maybe not so encouraging either.