Monday, 25 March, 2019

China cuts banks' reserve ratio to support growth

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Orlando Vargas | 07 January, 2019, 06:29

The cut comes amid mounting worries about the health of the world's second-largest economy, which is facing both slowing demand at home and punishing USA tariffs on its exports.

The cut in banks' reserve requirement ratios (RRR) is the first in 2019 and the fifth in a year by the People's Bank of China (PBOC) as the economy faces its weakest growth since the global financial crisis and mounting pressure from USA tariffs.

After four RRR cuts so far this year, the ratio for large banks dropped to 14.5pc in October, the lowest level since 2008.

By allowing banks to place a smaller reserve at the PBOC, the central bank has shelved "general" monetary policy tools including benchmark interest rate cuts and broad-based adjustment in the required reserve ratio - the minimum percentage of deposits a bank is required to have with the PBOC.

The size of the cut was at the upper end of market expectations, and the net funds released would be the largest amount in the five cuts since last January.

Today's cut is still "targeted" easing rather than wide-ranging stimulus, the PBOC said, adding that its "prudent monetary policy stance hasn't changed".

Consumption will remain the main driver of China's economy, as weaker credit growth weighs on investment and slowing global demand and higher USA duties on Chinese good take a toll on the country's exports, the report said.

The PBOC will cut the RRR by 0.5 percentage points on January 15 and January 25, respectively, a PBOC statement said. The world's two largest economies are reportedly set to hold trade talks in Beijing next week.

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Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed China's economy was continuing to lose steam.

Small and micro-sized companies with a credit line of less than 10 million yuan (US$1.46 million) will be able to take advantage of reserve-requirement ratio cuts, compared to the previous standard of 5 million yuan, said the PBOC in a statement.

"We will maintain reasonable and sufficient liquidity, maintain reasonable growth in the scale of money and credit and social financing, stabilise macro-leverage and seek internal and external balances", it said.

"The Chinese economy continues healthy development and stays within a reasonable range", it said.

The central bank said it believes the latest move could "guide" banks to lend more to small and tiny businesses.

In addition to monetary policy easing, last week China allocated its local government debt quota "ahead of schedule" to accelerate infrastructure spending.

But analysts see a further deceleration this year, even if a trade deal with the United States is reached.

The government maintains 2018 economic growth will still come in on target at around 6.5 percent this year, slowing from 6.9 percent in 2017.

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