People’s Bank of China extends required reserves on banks’ margin deposits

PBoC orders required reserves on margin deposits. Commercial banks will have to pay required reserves for securities margin and guarantee deposits from clients seeking bank acceptances of issuing letters of guarantee and letters of credit.

Mopping up about RMB900-950bn of liquidity in the next three months, equivalent to RRR hikes of 100-150bp. Central bank data show such deposits amounted to RMB4.4trn at the end of July. If based on the current required reserve rate of 21.5%, this suggests the central bank would lock up around RMB900-950bn, equivalent to RRR hikes of 100-150bp.

Banks will pay reserves to the central bank in batches, so as to ease any shock on the money market. Big banks will hand in 20% of the reserves in September, while medium- and small-sized banks will pay 15% next month.

Combating inflation still the PBoC's top priority. This move is a substitute for our call for two RRR hikes and would help the central bank to mop up excessive liquidity in the market as China's top monetary authority continues to regard curbing inflation as its policy priority. We now see no need for further RRR hikes (vs. our previous call for another 100bp hikes).

This would also increase the forcefulness and effectiveness of the RRR tool, which previously only covered demand and time deposits. Banks had encouraged depositors to buy wealth management products to reduce outstanding time and demand deposits in a bid to boost profit margins. We note that deposits decreased by RMB667bn in July.