January 19, 2019

Central bank to relax reserve ratio criteria to enhance lending

07 January 2019, 06:27 | Austin Hogan

Stocks Get a Lift From China Easing Fed Flexibility EM ReviewMore

Stocks Get a Lift From China Easing Fed Flexibility EM ReviewMore

The latest support measures come 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 exported goods. The cut in banks' reserve requirement ratios is the fifth such move over the past year as the economy also faces mounting pressure from USA tariffs. It cut the ratio for all banks, freeing up a net 800 billion yuan (£92 billion) after lenders use some of the 1.5 trillion yuan in liquidity released to pay back maturing medium-term loans.

The announcement came just hours after Premier Li Keqiang said China would take further action to bolster the economy, including reserve requirement ratio (RRR) cuts and more cuts in taxes and fees, highlighting the urgency to cope with increasing headwinds.

The reduction is being made in two equal stages, effective January 15 and January 25, the PBOC said.

The cuts will be effective January 15 and January 25, and come ahead of the long Lunar New Year celebrations when cash conditions often get tight.

"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. Early indicators for December signal the economic slowdown is deepening, after official data showed industrial production growth was the weakest in a decade and industrial profits fell for the first time in nearly three years in November. The world's two largest economies are reportedly set to hold trade talks in Beijing next week.

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The measures will also include targeted RRR cuts aimed at supporting small and private companies, Mr Li was quoted as saying in a statement on the website of the Chinese government. Implementing the cut in two phases ensures "overall banking liquidity stays reasonable and sufficient while balancing internal and external factors to keep the yuan's exchange rate at a reasonable and equilibrium level", it said.

Lian Ping, chief economist at the Bank of Communications, said the pressure of the economic slowdown would show up in the first half of 2019 when the existing USA tariffs on US$250 billion of Chinese goods would bite deeper into the economy.

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

China's economic growth is expected to have cooled to around 6.5 percent a year ago, in line with Beijing's target but down from 6.9 percent in 2017.

Beijing has been stepping up its efforts in stimulating growth, which is decelerating quickly amid the trade war with the United States.

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