PBOC raises Reserve Requirement Ratio (RRR) by 50bp

China – the PBOC raises Reserve Requirement Ratio (RRR) by 50bp as of 2/25, the second
such hike in ’10. After the increase, major banks will have to keep 16.5% of their deposits on
reserve. For large banks, RRR is now raised to 16.5% and for small banks, it is now 14.5%.
This compares to the historical high of 17.5% in the summer of 2008, right before the
Lehman crisis. Although today's hike comes in a bit earlier than we expected (we expected a
RRR hike right after the Chinese New Year), this is indeed in line with our view that the
central bank is focusing on quantitative measures to manage liquidity and control loan
expansion, and thus a near-term RRR hike is possible. Going further ahead, the National
People’s Congress commencing on March 5 will be the key event to watch for top
authorities’ shift in policy stance, if any. We expect policymakers to emphasize the gradual
normalization of monetary conditions and the management of asset inflation and general
inflation expectations, with a more flexible approach in policy response to prevailing macro
conditions. We expect gradual CNY appreciation to resume sometime in 2Q, when the
exports recovery confirms. Qian Wang