The People’s Bank of China has eased policy once again as it tries to reignite the economy which increasingly appears to be stalling.
The reduction of 50 basis points in the Reserve Requirement Ratio will reduce the amount of capital banks need to hold against their assets and free up around RMB600 billion (US$96 billion) into the banking system according to Khoon Goh, Senior FX Strategist at ANZ Singapore.
The move is a signal that policymakers are concerned with the recent weaker flow of data from China. The softer than expected manufacturing and services PMIs this week were the catalyst for action.
Also part of the equation, according to Goh, was the tightening in local monetary conditions as capital has exited China since last year, and the upward pressure this has put on USDCNY.
ANZ believes the Chinese central bank, the PBOC, will be trying to avoid this combination of upward pressure on USDCNY (meaning the RMB is getting weaker) and the potential for more capital outflows.
With a slowing economy that guarantees more easing of monetary policy.