How the China RRR cut will impact its economy? - Part 2

China had cut its required reserve ratio (RRR) for the 2nd time this year recently.

The average weighted RRR was also cut from 8.9% to 8.4% in December 2021.

How will the reduced RRR help to boost China's economy?  We had explained this before.

http://sg-stock.blogspot.com/2019/05/how-china-rrr-cut-will-impact-its.html

We will illustrate the differences in RRR with examples.

The deposit rates in China are as follow:

RMB deposit rates in Singapore from a China bank are:

Since the 1-year deposit rate is almost identical to a 2-year deposit rate in China, we will use the 2-year deposit rate in China (2.1%) as the cost of debt.

If the RRR is 12.5%, the effective cost of debt rate will be 2.4% {2.1/(100-12.5)}.  When the RRR is reduced to 11.5%, the effective cost of debt will be 2.37% {2.1/(100-11.5)}.  Thus, we can see that the bank's cost of debt is reduced as the RRR goes lower because the bank doesn't need to hold more cash. Furthermore, the extra idling cash can be put to better use to generate some income which will increase the bank's profitability.

In conclusion, we do not expect China to reduce its benchmark rates to boost its economic growth because of elevated PPI and rising CPI.  Conversely, China will continue to reduce its RRR since it still has a high RRR compared to western countries and China will also inject liquidity into its financial system through the repo market whenever the need arises.