China cuts bank reserve requirement to spur economy amid trade war

Roman Schwartz
January 7, 2019

The PBOC will cut the RRR by 0.5 percentage points on January 15 and January 25, respectively, a PBOC statement said.

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.

In addition, the medium-term lending facility that will mature in the first quarter of 2019 will not be continued.

The bank said in a statement that the measure will release 1.5 trillion yuan (about $218 billion) of liquidity into the market.

Policy support might include tax reduction, across-the-board reserve requirement ratio (RRR) cuts, and targeted RRR cuts.

The offshore yuan pared gains slightly to trade 0.1 per cent higher at 6.8763 per dollar as of 6:30 p.m. local time.

By allowing banks to place a smaller reserve at the PBOC, the central bank has shelved "general" monetary policy tools including benchmark interest rate cuts and broad-based adjustment in the required reserve ratio - the minimum percentage of deposits a bank is required to have with the PBOC.

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"The People's Bank of China (PBoC) will inject a significant amount of cheap funds to plug the liquidity hole", said Ming Ming, Citic's head of fixed-income research.

"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. Lowering the ratio is expected to boost lending.

China reported on Monday that factory activity shrank in December for the first time in over two years.

Keeping employment stable relies on numerous small and micro-sized enterprises, whose development requires the support of inclusive financing, a promising and beneficial cause, Li made the remarks during a visit to Bank of China, Industrial and Commercial Bank of China, and China Construction Bank.

But the central bank said growth was still within a reasonable range and it would continue to implement a prudent monetary policy, without engaging in massive stimulus.

"How much can this help the economy remains to be seen", said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong.

This will allow banks to lend more capital to enterprises now classed as small businesses, and therefore free up more reserves from the central bank, with estimates ranging from 400 billion yuan to as much as 700 billion yuan. "This is a classic case of banking disintermediation amid the down cycle".

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