Published: Mon, January 07, 2019
Business | By Eloise Houston

China cuts banks' reserve ratio to ratchet up support for 2019

China cuts banks' reserve ratio to ratchet up support for 2019

The People's Bank of China (PBOC) plans to cut the reserve requirement ratio (RRR) twice this month, once on January 15 and once on January 25, for a total reduction of 100 basis points.

The cut in banks' reserve requirement ratios is the fifth such move over the past year as the economy also faces mounting pressure from US tariffs.

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. Medium-term Lending Facility loans maturing in the first quarter won't be rolled over, and the amount of liquidity released will be able to offset the funding squeeze ahead of the Chinese New Year, it said.

The order from Li to the central bank, which is part of the Chinese government, showcased Beijing's willingness to go further in policy easing to keep its economic growth on track.

China reported on Monday that factory activity shrank in December for the first time in over two years, highlighting the challenges facing Beijing as it seeks to end a bruising trade war with Washington and reduce the risk of a sharper economic slowdown in 2019.

"The old playbook of China's economy seems to be back", said Shao Yu, chief economist at Orient Securities in Shanghai.

"Policy easing will be stepped up further over coming months", Capital Economics said in a research note.

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.

Local governments are encouraged to set up financing funds for private enterprises, and supportive tools for equity and bond financing for private firms will also be promoted, according to a statement released Friday after a work conference of the People's Bank of China (PBOC).

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.

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.

Still, economic growth is thought to have cooled to around 6.5 percent a year ago - which would be the weakest since 1990 - in line with the target but down from 6.9 percent in 2017.

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