China cuts bank reserve requirements as economy slows


By Stella Qiu and Kevin Yao

BEIJING (Reuters) – China said on Friday it would cut the amount of cash banks must hold as reserves for the first time this year, freeing up about 530 billion yuan ($83.25 billion) of long-term cash. term to cushion a sharp downturn in the economy. 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), starting April 25, but analysts said that might not yet be enough to reverse the trend. to slow down.

Heightened global risks from war in Ukraine and China, widespread COVID-19 lockdowns and a weak housing market have triggered convulsions in the world’s second-largest economy that are rapidly rippling through global supply chains.

China’s exports, the last major engine of growth, are also showing signs of fatigue, and some economists believe that the risks of recession are increasing.

“I don’t think this reduction in RRR is that big for the economy at this point,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, noting that it was lower than markets had expected.

“The main challenge facing the economy is Omicron outbreaks and lockdown policies that restrict mobility. More liquidity may help at the margins, but it doesn’t solve the root of the problem,” he said. he declares.

The PBOC said the latest RRR cut would increase banks’ long-term funds, allowing them to scale up support for industries and businesses affected by COVID-19 outbreaks, and reduce costs for banks. It will reduce financial institutions’ annual funding costs by about 6.5 billion yuan.

The PBOC will also continue to keep liquidity broadly stable, while closely monitoring inflationary trends and policy changes made by developed countries, he said.

For urban commercial banks that do not have inter-provincial businesses and rural commercial banks that have an RRR of more than 5%, they are entitled to an additional reduction of 25 basis points.

The weighted average RRR of financial institutions will be lowered to 8.1% after the cut, the central bank said.

Ting Lu, chief China economist at Nomura, expects another 25 basis point RRR cut before the end of the year, most likely before mid-2022, before cutting the RRR for some large 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 investments, technology and elderly care through the MLF. medium-term lending), lending and rediscounting channels,” Lu said.

ONBOARD WINDS

The cut, which follows a broad cut in December, was widely expected after China’s cabinet said on Wednesday that monetary policy tools should be used in a timely manner to support growth.

The PBOC also began cutting interest rates, while local governments accelerated infrastructure spending and the finance ministry promised more tax cuts.

China’s economy rebounded strongly from a pandemic-induced slump in 2020, but cooled in 2021 due to continued weakness in the property market and stringent measures to contain COVID-19 surges , which have hurt consumption.

The government’s determination to halt the latest spread of record COVID-19 cases has clogged highways and ports, stranded workers and shuttered countless factories – disruptions that are destroying global supply chains for goods ranging from vehicles electrical to iPhones.

Chinese imports fell unexpectedly in March as restrictions hampered cargo arrivals and weakened domestic demand, while export growth also slowed. Activity in the factory and service sectors contracted.

The government is aiming for economic growth of around 5.5% this year as headwinds strengthen, but some analysts say that could now be difficult to achieve without more aggressive stimulus.

With other major central banks such as the US Federal Reserve poised or already aggressively raising interest rates, more aggressive easing in China could spur potentially destabilizing capital outflows as investors transfer money money into higher yielding assets.

Earlier on Friday, the PBOC kept the rate on its medium-term lending facility unchanged for a third consecutive month, as expected.

(Additional reporting by Ellen Zhang and the Beijing newsroom; Editing by Kim Coghill and Gareth Jones)

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