China to Cut RRR amid Slower Economic Growth

07 January, 2019, 09:27 | Author: Mary Valdez
  • China cuts bank reserve requirement to spur economy amid trade war

Measures will include targeted required-rate-of-return (RRR) cuts, said a statement.

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.

Liao Zhiming, an analyst at Tianfeng Securities, wrote that the move could unleash as much as 700 billion yuan of funds, while analysts at China International Capital Corporation expected the change to release only 400 billion yuan of liquidity.

This RRR standard adjustment has also triggered the market's expectation of further cuts.

Global stock markets sold off on Thursday after a warning from tech giant Apple Inc about slowing China sales, while data earlier this week showed the country's manufacturing activity shrank in December for the first time in over two years.

China's central bank acted to release cash into the economy to support growth, cutting the amount of cash lenders must hold as reserves by 1 percentage point.

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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 previous year.

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 the first cut since October last year and the fifth in a year. One big wild card is how the trade war between the United States and China will play out in 2019.

"We will maintain reasonable and sufficient liquidity, maintain reasonable growth in the scale of money and credit and social financing, stabilize macro-leverage, and seek internal and external balances", it said.

The PBOC said it will keep the prudent monetary policy "neither too tight nor too loose" while maintaining market liquidity at a reasonably ample level and the market interest rate level reasonably stable. The government has also ramped up spending on infrastructure to rekindle sluggish demand and investment.

In December 2018, World Bank said China's economic growth is likely to slow to 6.2% in 2019 from an expected 6.5 percent this year.

A further deceleration is seen this year, with some analysts forecasting growth will cool to almost 6 percent, which would mark China's weakest expansion since 1990. "The central bank has been handing liquidity to the banks, but the banks are unwilling to lend".

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