China cuts banks' reserve ratios to spur growth

The People's Bank of China headquarters in Beijing. The central bank will inject a net 750 billion yuan (S$151 billion) in cash into the banking system with the cut in reserve requirement ratios.
The People's Bank of China headquarters in Beijing. The central bank will inject a net 750 billion yuan (S$151 billion) in cash into the banking system with the cut in reserve requirement ratios.PHOTO: REUTERS

BEIJING • China's central bank said yesterday it would cut the amount of cash that most banks must hold as reserves to lower financing costs and spur growth, amid concerns over a potential economic drag from an escalating trade dispute with the United States.

The reserve requirement cut, the fourth by the People's Bank of China (PBOC) this year, comes after Beijing has pledged to expedite plans to invest billions of dollars in infrastructure projects as the economy shows signs of cooling further, with investment growth slowing to a record low. Reserve requirement ratios (RRRs) - currently 15.5 per cent for large institutions and 13.5 per cent for smaller banks - would be cut by 100 basis points effective from Oct 15, the PBOC said.

The central bank will inject a net 750 billion yuan (S$151 billion) in cash into the banking system with the cut by releasing a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of that to offset maturing medium-term lending facility loans.

The RRR cut, announced on the last day of China's week-long National Day holiday, shows the central bank is likely worried about the impact of "external shocks" to markets such as a speech last week by US Vice-President Mike Pence, said Zhonghai Shengrong Capital Management chief economist Zhang Yi.

Mr Pence intensified the US' pressure campaign against Beijing last Thursday by accusing China of "malign" efforts to undermine US President Donald Trump ahead of next month's congressional elections and reckless military actions in the South China Sea.

His speech marked a sharpened US approach towards China, going beyond the bitter trade war between the world's two biggest economies, which has magnified concerns about the outlook for China's economy.

  • 6.7%

  • China's economic growth rate in the second quarter compared with a year ago. It slowed slightly but is still well above the government's full-year target of about 6.5 per cent.

Weakening exports were already a drag on growth in the first half of the year after giving an added boost to the economy last year, highlighting the need for sustained strength in domestic demand if significant new US tariffs are imposed.

The "very timely" RRR cut is big enough to help boost confidence in the economy, said deputy chief economist Xu Hongcai at the China Centre for International Economic Exchanges, a Beijing think-tank. "The trade war's impact on the economy is showing. There is room for further reductions and I expect another 1 percentage point cut by the year end."

The central bank said yesterday that it would continue to take necessary measures to stabilise market expectations, while maintaining a prudent and neutral monetary policy. The RRR cut would not create depreciation pressure on the yuan, the PBOC said, adding that the central bank would keep the foreign exchange markets stable.

With China's economy cooling and the full impact of US trade tariffs still to be felt, policymakers are shifting their priorities to reducing risks to growth, with the yuan and stock markets under pressure.

China's economic growth rate slowed slightly to 6.7 per cent in the second quarter year on year, still well above the government's full-year target of around 6.5 per cent. But some key activity indicators have weakened more sharply.

REUTERS

A version of this article appeared in the print edition of The Straits Times on October 08, 2018, with the headline 'China cuts banks' reserve ratios to spur growth'. Print Edition | Subscribe