China slashes banks' reserve requirements again as economy slows

07 January, 2019, 06:29 | Author: Brooke Harris
  • China cuts banks' reserve ratio to support growth

China's economic growth appears to be slowing faster-than-expected amid escalating risks of a synchronized global slowdown, with manufacturing activity contracting in December for the first time in more than two years.

The policy move was announced hours after Chinese Premier Li Keqiang told the central bank to make universal cuts of the ratio as part of Beijing's efforts to bolster economic growth having cut the RRR four times past year.

"It is hard to clearly understand the overall policy effect as every institution has to make their own calculations", said Ding Shuang, chief Greater China economist at Standard Chartered Bank.

The People's Bank of China (PBOC) will likely release a significant amount of funds in order to meet the upcoming liquidity crunch such as through RRR cuts and providing funding for lenders who make loans to private companies.

"This speedy RRR cut with great intensity fully demonstrates the determination of policymakers to stabilise growth", said Yang Hao, an analyst at Nanjing Securities.

"With credit growth still slowing and, typically, a six-month lag before any turnaround in credit affects the economy, worries about the outlook for China will persist for several months yet". The size of the move was on the upper end of market expectations, and the net funds released would be the largest amount in the five cuts since last January.

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The reductions will be made in two stages on January 15 and January 25. Separate reports out Friday noted revived trade talks were set to resume on Monday.

The key for the financial sector to serve the real economy is to cope with the need of keeping economic growth within a reasonable range and stabilizing employment, Li said.

Analysts at JPMorgan Chase said that the central bank's action suggests that "the Chinese government is tilting toward a growth-oriented stance".

The central bank said it believes the latest move could "guide" banks to lend more to small and tiny businesses. But tighter liquidity conditions are possible before the Spring Festival in early February, they said, which requires proper liquidity operations from the central bank to prevent volatility and maintain lower market interest rates. The government has also ramped up spending on infrastructure to rekindle sluggish demand and investment.

Still, economic growth is thought to have cooled to around 6.5 percent past year - which would be the weakest since 1990 - in line with the target but down from 6.9 percent in 2017.

Together, the new measures should inject about 800 billion yuan ($116 billion) into the world's second largest economy as growth slows and a trade war with the United States takes its toll.

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