China Cuts Banks’ Reserve Ratio


China’s central bank reduced the amount of reserves commercial banks are required to hold, freeing up about $200 billion for lending in the latest easing measure to shore up the world’s second-largest economy.

The People’s Bank of China’s one percentage point cut in the reserve requirement, announced Sunday, is a larger-than-usual reduction. It is the second cut in banks’ reserve requirement in less than three months and comes after the economy decelerated to 7% year-over-year growth in the first quarter, the slowest pace in six years.

“The question is whether the PBOC is a little slow on easing. They’re fighting the last battle, like generals do,” said Tim Condon, ING’s chief Asia economist.

China has been struggling with economic ills, ranging from a slumping property market and persistent industrial overcapacity to high debt levels among companies and local governments. Many Chinese officials and economists say the central bank will have to step on the easing pedal harder for Beijing to reach its 7% annual growth target for this year–already the lowest level in 24 years.

The government has been trying to guide the economy to a soft landing. But the latest step highlights concerns growth continues to flag and that two interest-rate cuts since November and other easing measures helped heavily indebted industries and fueled a run-up in the stock markets, but failed to lift areas that nurture demand and consumption, such as small businesses. Borrowing costs for business remain high, made worse by weak prices that border on disinflation.

Still, China’s central bank officials remain wary of too much easing, for fear that relaxing credit too aggressively would add to the country’s debt problems and put the economy at greater risk. In a statement at the International Monetary Fund’s meetings in Washington this weekend, the People’s Bank governor, Zhou Xiaochuan, said that while China’s economic growth is slowing, it’s still within a “reasonable range” and employment growth remains stable. Mr. Zhou reiterated that China will maintain a “prudent” monetary policy stance.

Sunday’s announced cut, which lowers the reserve-requirement ratio, or RRR, to 18.5%, takes effect Monday. The move frees up about 1.2 trillion Chinese yuan (US$194 billion) in additional funds that banks can now lend. The central bank also announced additional reserve reductions aimed at banks catering to agriculture and small businesses, which some analysts say will free up an additional 300 billion yuan in funds.

A question now is whether Chinese banks and companies will take advantage of these new efforts or hold fast amid further signs of slowing growth.

Despite prodding from policy makers, Chinese banks have become increasingly cautious about making loans, especially to small and private businesses, which are generally seen as higher credit risks than big state-owned companies–the state banking sector’s mainstay customers. On Friday, China’s Premier Li Keqiang urged banks to step up their support to the economy, saying that the government would give commercial banks “preferential policies” if they lend to small borrowers.

The latest reserve-requirement cut was unusually large in scale. The central bank last cut the required reserves in early Feb.–the first such move since May 2012–by the typical half a percentage point.

In the past, the central bank used the reserve requirement to counteract cross-border capital inflows, hiking the ratio banks were required to hold to sop up money investors were pouring into China to capitalize on the red-hot economy. Now, with the Chinese economy cooling, there are increased signs of money leaving China’s shores. Yuan positions on the central bank’s balance sheet, a gauge of capital flows, declined a record 251.1 billion yuan in the first quarter. With the outflows come higher expectations for more reserve cuts.

“China should cut the RRR 20 times in the next five years as the pattern of capital flows has changed significantly,” said China economist Larry Hu at Macquarie Group Ltd.

Source from : Dow Jones