China slashes banks’ reserve requirements again as economy slows

Daniel Fowler
January 6, 2019

According to the country's Premier Li Keqiang in a statement, the measures will include targeted RRR cuts aimed at supporting small and private firms.

The latest reduction announced is the first all-inclusive RRR cut since March 2016.

The People's Bank of China said the reserve requirement ratio will be lowered by 1.0 percentage point, with the stimulus going into effect later this month.

"Given the pressures the economy is facing though, it could still be months before growth stabilizes", noted the analysts at Capital Economics.

Global stock markets sold off on Thursday after a warning from tech giant Apple Inc about slowing China sales, while data this week showed manufacturing activity shrank in December for the first time in more than two years. It cut the ratio for all banks, freeing up a net 800 billion yuan ($116.51 billion) after lenders use some of the 1.5 trillion yuan in liquidity released to pay back maturing medium-term loans.

China and the United States will hold vice ministerial level trade talks in Beijing on January 7-8, as they seek to end a dispute that is inflicting increasing pain on both economies and roiling global financial markets.

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

In the same survey, an index that indicated bank loan demand in small and micro-enterprises increased to 67.9 in the fourth quarter, up from 67.1 in the third quarter, and it is also higher than the indices for medium-sized and large companies, reflecting small-scale businesses' stronger desire to obtain credit.

But analysts see a further deceleration this year, with growth cooling to the low 6-percent range even if a trade deal with the United States is reached.

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

Louis Kuijs, chief Asia economist of Oxford Economics, wrote in a note on Friday that China's GDP growth this year could slow to 6.1 per cent from an estimated 6.6 per cent in 2018, and Beijing would rely on policy easing to halt a decline in the growth rate.

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