According to the PBOC, FX assets on its balance sheet contracted by 252 billion yuan in Q1. In the same period last year they increased by 788 billion yuan. Private investment stood at 4.61 trillion yuan in Q1, down 895 billion yuan year on year.
"With yuan funds from foreign exchange decreasing and increasing pressure of FX outflow, the RRR cut comes at the right time," Lian said.
Guan Qingyou of Minsheng Securities said the RRR cut will help financial institutions defend themselves against credit risk as outdated production capacity is eliminated nationwide.
"The RRR cut will help keep the financial market stable, prevent an economic downturn caused by deflation, and win time for restructuring," he said.
On Friday, PBOC governor Zhou Xiaochuan said on the sidelines of a World Bank-IMF meeting in Washington DC that China will continue prudent monetary policy, but be flexible based on economic data.
ROOM FOR MORE
Prior to the RRR cut, Chinese Premier Li Keqiang visited the headquarters of the Industrial and Commercial Bank of China, and the China Development Bank, a policy bank. The premier called on banks to help restructuring, stabilize economic growth, and reduce costs for small and medium-sized enterprises (SMEs).
Apart from the 100-bps cut in RRR for all banks, the PBOC also delivered additional RRR cuts for rural credit cooperatives, village banks, rural cooperative banks and the Agricultural Development Bank of China to help SMEs, agriculture and water projects.
There have been two interest rate cuts since November, the latest in March, and business financing costs have declined, albeit moderately, with their borrowing rate 6.83 percent at the end of March, down 12 basis points from three months ago.
Relaxed mortgage rules for second home purchases set the property market rising last month, with home sales up 65.9 percent month on month. The manufacturing sector also expanded in March.
Wang Tao of UBS said the RRR will not just improve business and market sentiment, but ensure adequate credit and liquidity. She predicted more monetary easing this year, including a benchmark rate cut. One more RRR cut remains possible.
Lian Ping also expects one more RRR cut this year given the persistent downward pressure on the economy, with the interest rate cut dependent on deflation risk.
