Article Summary
The People’s Bank of China (PBOC) has announced cuts to reverse repurchase rates and reserve requirement ratios (RRR) to support China’s real economy, which has been affected by US tariff policies. The move injects Rmb1 trillion ($138.4 billion) of long-term liquidity into the market and lowers the RRR for auto financing firms and financial leasing companies to zero. These actions aim to counteract the negative impact of tariffs, support businesses and consumers, and improve China’s trade negotiations with the US. The PBOC’s actions came after China’s manufacturing Purchasing Managers’ Index (PMI) declined to 49.0 in April, indicating contraction and indicating the potential for slower growth in the country’s services sector.
What This Means for You
- Expect improved financial support for Chinese businesses, especially in the automobile and financial leasing sectors, as the PBOC aims to ease the negative impact of US tariffs and stimulate economic growth.
- Stay informed about the progress of Sino-US trade talks, as stabilizing these discussions is important for global market stability and growth.
- Monitor key economic indicators such as China’s PMI and services PMI, as they are sensitive to changes in trade and macroeconomic policies, and could be early signals of the potential for shifts in global economic dynamics.
- Be cautious regarding financial stability in China, as the focus on providing liquidity might adversely affect banks’ net interest margins, creating potential risks to financial stability.
Original Post
The People’s Bank of China (PBOC), China’s central bank, announced on May 7, 2023, that it would lower the seven-day reverse repurchase rates by 10 basis points to 1.4% from May 8, 2023. Additionally, the reserve requirement ratio (RRR) for financial institutions will be lowered by 50 basis points, effective May 15, 2023. Governor Pan Gongsheng stated that the move aims to increase the central bank’s support for China’s real economy, which has shown signs of being affected by US tariff policies.
In response to US orders of Chinese goods becoming increasingly expensive due to tariffs, US president Donald Trump has implemented a 145% tariff on certain Chinese goods. China has retaliated by imposing 125% tariffs on US goods, leading Chinese firms to source from other countries, such as Brazil. To support affected companies and consumers, the PBOC will inject Rmb1 trillion ($138.4 billion) of long-term liquidity into the market due to the monetary policy adjustments. The RRR for auto financing firms and financial leasing companies will be lowered to zero, and the PBOC will help expand lending capabilities for institutions supporting automobile consumption and equipment renewal investments.
Trade talks between a Chinese delegation led by vice-premier He Lifeng and US representatives, including treasury secretary Scott Bessent, are expected to occur in Switzerland between May 9 and 12, 2023. Meanwhile, the US and the UK are anticipated to announce a trade deal on Thursday, May 8, 2023, while the US Federal Reserve has decided to hold interest rates at 4.25% to 4.5%.
A Foreign Ministry spokesperson stated the ministry’s official position on May 7, 2023: “Any kind of conversations should be based on equality, respect, and mutual benefits. Any form of pressure or threats on China is not going to
Key Terms
- Reverse Repurchase Rates
- Reserve Requirement Ratio (RRR)
- China’s Real Economy
- Sino-US Trade Talks
- US Tariffs
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