China targeted RRR cut, not necessarily more easing

A system-wide RRR cut was expected, but the PBoC switched back to targeted cuts, 50bp for those banks whose lending to agriculture and SMEs reach a certain percentageand 300bp for finance companies, which manage excess cash for big corporates.

The amount of liquidity to be freed up as a result will be about CNY450bn, equivalent to a 35bp system-wide RRR cut.

The choice of a targeted cut, rather than a system-wide one, delivers an important message. The PBoC is a bit hesitant to push interbank rates too low. For the 7-day reporate, the targeted range by the PBoC is 2-2.5%, says Societe Generale.
Adding liquidity does not necessarily mean further easing if the PBoC only intends to push the rate back to 2%, but no further.

Therefore, there is no need for a system-wide RRR cut. On the other hand, a more measured dose of liquidity via a targeted cut may help stabilise market rates without pushing them too low. We will know soon if this is indeed the case.