More steps to boost yuan supply likely

The People's Bank of China provided about 200 billion yuan ($32.7 billion) of funds to some national and regional lenders in October, after injecting 500 billion yuan into China's five biggest banks. [Si Wei / China Daily]

Reduced currency market intervention by China's central bank is fueling speculation it will cut lenders' reserve requirements for the first time in two years to boost the supply of yuan.

The nation's foreign-exchange reserves slid by a record $105.5 billion in the third quarter to $3.89 trillion as the People's Bank of China scaled back dollar purchases that add yuan to the financial system.

Major lenders will need to set aside 19.5 percent of deposits in reserve by June 30 and 19 percent by the end of 2015, down from 20 percent now, based on the median forecast in a Bloomberg survey published on Wednesday.

The world's largest currency pool is shrinking as the yuan heads for its first annual loss in five years and economists forecast the slowest economic expansion in 24 years. The PBOC has already cut reserve-ratio requirements for some lenders and is pumping cash into money markets to lower borrowing costs.

"The very high RRR is no longer necessary," Changchun Hua, China economist for Nomura Holdings Inc in Hong Kong, said in an Thursday interview. "If growth is weak, in order to give the market a moderately strong signal, an RRR cut is appropriate."

The yuan fell 3.3 percent against the dollar in the first four months of this year before rising 2.4 percent over the next six months. That pared its loss for 2014 to 1 percent to 6.1135.

Nomura estimated the central bank bought a net $21 billion in the currency market in the six months through September to limit yuan gains, down from $106 billion in the first quarter when it was seeking to encourage two-way moves in the currency. The central bank often takes steps to mop the yuan sold in so-called sterilization.

The yuan is close to a reasonable, equilibrium level, Guan Tao, head of the balance of payments department at the State Administration of Foreign Exchange, wrote in an article in the Shanghai Securities News on Thursday.

As China promotes a market-oriented exchange-rate mechanism and the central bank refrains from regular intervention, the yuan's exchange rate will swing and "we need to stay composed", he said.

"A reserve-requirement ratio cut may be inevitable," CICC economists led by Beijing-based Liang Hong wrote in an Oct 27 report. "A 20 percent requirement was to sterilize quick growth in forex positions. When the trend reverses, it may be lowered accordingly."

The central bank provided about 200 billion yuan ($32.7 billion) of funds to some national and regional lenders in October, after injecting 500 billion yuan into China's five biggest banks－Industrial and Commercial Bank of China Ltd, Bank of China Ltd, China Construction Bank Corp Ltd, Bank of Communications Co Ltd and Agricultural Bank of China Ltd－in September, according to people familiar with the matter.

The monetary authority also lowered the reserve ratio twice for selected banks in the second quarter. The PBOC last announced a system-wide cut in 2012.

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