The PBoC’s fourth-quarter monetary policy report, released over the weekend, provides further evidence that monetary conditions have loosened, supporting an optimistic view of near-term economic prospects.

Bears claim that foreign exchange intervention has squeezed banking system liquidity, threatening a credit crunch. A previous post argued that the PBoC has more than offset the intervention drain by cutting banks’ reserve requirements. The latest report confirms this: banks’ excess reserves (i.e. the surplus over requirements) rose from 1.9% of their deposit base at end-September to 2.1% at end-December – see first chart.


With their liquidity position remaining healthy, banks have passed cuts in official benchmark interest rates through to borrowers. The average rate on loans to non-financial enterprises fell by a further 37 basis points (bp) last quarter, to its lowest level in data in data extending back to 2009; the average mortgage rate declined by 32 bp, to its lowest since the first quarter of 2010 – first chart.

In other news, foreign reserves fell by a further $99.5 billion in January, following a $107.9 billion December decline. The monthly reserves change exhibits a positive correlation with the spread between the offshore (CNH) and onshore (CNY) renminbi exchange rates versus the US dollar. The spread narrowed sharply last week, suggesting a slowdown in the reserves outflow – second chart.


Economic news flow is currently light because of the Chinese New Year. Last week’s Markit / Caixin purchasing managers’ surveys were encouraging, with both manufacturing and services polls stronger in January – third chart.


The OECD’s Chinese leading indicator*, meanwhile, accelerated further in December, according to data released today – fourth chart.


*See previous post for details of this indicator.