China cuts reserve requirements for banks as economy slows By Reuters

© . FILE PHOTO: The headquarters of the People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China Sept 28, 2018. REUTERS/Jason Lee By Stella Qiu and Kevin Yao BEIJING () – China said Friday it would amount of cash that banks must hold as reserves for the first time this year, freeing up about 530 billion yuan ($83.25 billion) of long-term liquidity to cushion a sharp slowdown in economic growth. The People’s Bank of China (PBOC) said on its website that it would cut the reserve requirement ratio (RRR) for all banks by 25 basis points (bps) effective April 25, but analysts said it might not be enough just yet. to delay. Increased global risks from the war in Ukraine and in China have caused widespread COVID-19 lockdowns and a weak real estate market to convulsions in the world’s second-largest economy that are rapidly spilling over into global supply chains. Chinese exports, the last major growth engine, are also showing signs of fatigue, with some economists saying the risks of a recession are mounting. “I don’t think this RRR made that much of a difference to the economy at this stage,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, noting that it was less than the markets had expected. “The biggest challenge facing the economy is Omicron’s outbreaks and lockdown policies restricting mobility. More liquidity can help at the margins, but it won’t get to the root of the problem,” he said. The PBOC said the latest cut in the RRR would boost long-term funds for banks, allowing them to ramp up support for industries and businesses affected by COVID-19 outbreaks and cut costs for banks. It will reduce the annual financing costs of financial institutions by about 6.5 billion yuan. The PBOC will also keep liquidity stable overall, while closely monitoring inflation trends and policy changes in developed countries. Urban commercial banks that do not have cross-sector investment banks and rural commercial banks with an RRR of more than 5% are entitled to an additional reduction of 25 basis points. The weighted average RRR for financial institutions will be reduced to 8.1% after the cut, the central bank said. Ting Lu, China’s chief economist at Nomura, expects another 25 bp cut in the RRR before the end of the year, most likely by mid-2022, before cutting the RRR for some major banks that still have relatively high reserve ratios. “We expect the PBOC to focus on increasing its direct credit support to small and medium-sized enterprises, the agricultural sector, green investment, technology and aged care through the MLF (Medium Term Loan Facility), refinancing and rediscount channels.” said Lu. Headwinds The cut, which follows a broad cut in December, was widely expected after the Chinese cabinet said on Wednesday that monetary policy tools should be used in a timely manner to boost growth. The PBOC has also started cutting interest rates, while local governments have accelerated infrastructure spending and the Treasury Department has pledged more tax cuts. The Chinese economy recovered strongly from a pandemic-induced slump in 2020, but cooled in the course of 2021 due to continued weakness in the real estate market and strict measures to contain the COVID-19 flare-ups that are hurting consumption. The government’s determination to halt the latest spread of record COVID-19 cases has clogged highways and ports, stranded workers and closed countless factories — disruptions affecting global supply chains for goods ranging from electric vehicles to iPhones, breaking through. Imports from China fell unexpectedly in March as restrictions hampered cargo arrivals and weakened domestic demand, while export growth also slowed. Activity in the manufacturing and service sectors both declined. The government is targeting economic growth of around 5.5% this year as headwinds intensify, but some analysts say it may now be difficult to achieve without more aggressive stimulus. With other major central banks, such as the US Federal Reserve, committed to aggressively raising interest rates or already doing so, stronger easing in China could fuel potentially destabilizing capital outflows as investors shift money into higher-yielding assets. Earlier on Friday, as expected, the PBOC kept rates on its medium-term credit facility unchanged for the third straight month.

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