Beijing: China’s central bank cut the amount of cash banks must hold in reserve, stepping up its monetary policy action to cushion the economy from its worst COVID-19 outbreak since early 2020.
The People’s Bank of China lowered the reserve requirement ratio for most banks by 25 basis points and for smaller banks by 50 basis points, according to a statement published Friday.
The change is effective on April 25 and will unleash about 530 billion yuan ($83 billion) of long-term liquidity into the economy, the central bank said. The PBOC last reduced the ratio in December.
The move was signaled by the State Council, China’s cabinet, at a meeting on Wednesday. Top officials have also repeatedly warned of risks to growth and the need for more monetary and fiscal stimulus as the economic outlook worsens. Stringent measures to contain the COVID-19 outbreak have damaged production, strained supply chains and curbed consumer spending.
Major banks have downgraded their growth forecasts for this year, and economists now predict the economy to expand by 5 per cent, below the government’s target of around 5.5 per cent.
Earlier Friday, the PBOC refrained from cutting interest rates and injecting liquidity into the economy via the medium-term lending facility. Authorities also urged commercial lenders on Friday to lower their deposit rates, according to people familiar with the matter, a move to help ease funding costs for banks so they can boost lending.
The PBOC is running out of policy space as rate hikes by the US Federal Reserve begin to fuel capital outflows and threaten the yuan. Tighter monetary policy in the US has already wiped out China’s yield premium over US Treasuries.
Even so, officials from the banking regulator said Friday that China remains appealing to global investors given the economy’s long-term prospects and its higher real interest rate.
Cutting the RRR is an effective way to unleash cheap long-term liquidity. With local governments speeding up infrastructure bond sales, the cash boost may help banks to finance the surge in bonds.
The room for further RRR reductions may be shrinking though. Economists say the central bank may soon need to shift away from a widespread use of the RRR as it’s already relatively low and is becoming a less effective tool to deal with the economy’s structural challenges.