Tuesday, 19 March, 2019

China cuts banks' reserve ratios by 1% as economy slows

SL_Premier Li China says will cut banks' reserve requirements, taxes, as bad news piles up
Russell Knight | 06 January, 2019, 22:13

Reserve requirement ratios (RRRs) - now 14.5 percent for large institutions and 12.5 percent for smaller banks - will be lowered by a total of 100 basis points (bps) in two stages, the People's Bank of China (PBOC) said.

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.

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

On Wednesday, the PBOC changed the definition of a small business, meaning an enterprise with a credit line of less than 10 million yuan will qualify for targeted RRR cuts, up from the previous standard of 5 million yuan. 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.

Market analysts saw stable liquidity in the overall financial system recently. But tighter liquidity conditions are possible before the Spring Festival in early February, they said, which requires proper liquidity operations from the central bank to prevent volatility and maintain lower market interest rates.

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

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CFOs based in the country are also pessimistic about China's economic growth in 2019, according to a Deloitte survey.

Yu Yongding, a renowned Chinese economist and a former member of the central bank's monetary policy committee, said this week that it is not feasible for the PBOC to chase different policy goals at the same time while other central banks generally only focus on inflation.

The monetary policy transmission mechanisms will be further smoothed out while the proportion of direct financing will be increased to make financing more accessible and affordable for the private sector and small businesses, according to a statement issued after the meeting.

According to a survey released by the PBOC on Christmas Eve, in the fourth quarter 81.2pc of the participants from the banking sector said the current monetary policy is "appropriate", 4.1 percentage points higher than in the third quarter.

The central bank said this will help expand coverage of its preferential policies and guide banks to better meet the credit demand of small companies. Visit MarketWatch.com for more information on this news.

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