China cuts banks' reserve ratios as economy slows

Central bank's move will free up $157b to stimulate expansion

BEIJING • China's central bank yesterday said it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan (S$157 billion) in liquidity to shore up the country's slowing economy.

The People's Bank of China (PBOC) said on its website that it will cut banks' reserve requirement ratio (RRR) by 50 basis points, effective next Monday. The move would bring the level for big banks down to 12.5 per cent.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.

Many investors had been expecting Beijing to announce more support measures. While recent data has shown signs of improvement, and Beijing and Washington have agreed to de-escalate their long trade war, analysts are unsure if either will be sustainable.

Premier Li Keqiang raised expectations of an imminent cut in a speech in late December, saying the authorities were considering more measures to lower financing costs for smaller firms, including broad-based and "targeted" RRR reductions aimed at helping more vulnerable parts of the economy.

Freeing up more liquidity now could also ease the risks of a credit crunch ahead of the long Chinese New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to strains on China's financial system.

The PBOC said it expects total liquidity in the country's banking system to remain stable ahead of Chinese New Year.

Of the latest funds released, small and medium banks would receive about 120 billion yuan, the central bank said, stressing that the money should be used to fund small, local businesses.

Analysts at Nomura had forecast that the PBOC would deliver a system-wide 50 bps cut in the RRR before the holidays, together with an added reduction for some smaller banks.

Freeing up more liquidity now could also ease the risks of a credit crunch ahead of the long Chinese New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to strains on China's financial system.

Analysts say the US-China phase one trade deal will relieve only some of the pressure weighing on the Chinese economy, which has also been weighed down by sluggish domestic and global demand, slowing investment and weakening business confidence.

China plans to set a lower economic growth target of around 6 per cent this year, relying on increased state infrastructure spending to ward off a sharper slowdown, policy sources said. Growth has cooled from 6.8 per cent in 2017.

Smaller, private firms have been particularly hard hit as regulators clamped down on riskier types of financing and debt.

Despite Beijing's urging, commercial banks have been reluctant to lend to such firms as they are considered bigger credit risks than state-owned firms.

In recent months, China has also started to make modest cuts in major policy lending rates to lower corporate financing costs, with more expected in the new year.

But officials have repeatedly pledged not to resort to "flood-like" stimulus like that of past economic downturns, which left a mountain of debt and stoked fears of property market bubbles.

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 02, 2020, with the headline 'China cuts banks' reserve ratios as economy slows'. Print Edition | Subscribe