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China's central bank cut the reserve requirement ratio for all banks by 100 basis points. Photo: Bloomberg

China cuts reserve requirement ratio as growth slows

The central government has taken a dramatic step to bolster flagging growth by trimming the unusually large amount of cash reserves lenders must hold at the central bank, in a bid to boost lending to small businesses and the rural economy.

The People’s Bank of China announced on Sunday that it would cut the reserve requirement ratio by one percentage point to 18.5 per cent effective on Monday. The decision came after the world’s second-largest economy grew at its slowest pace in six years at the start of 2015.

 In a statement on its website, the PBOC said the cut would “further enhance the ability of financial institutions to support restructuring”.

 Economists said the cut was aimed at boosting growth because recent data has suggested the economy was losing momentum.

“The timing and the magnitude of the RRR cut beats expectation,” said Hao Hong,  chief economist and managing director of research at Bocom International.  

Hong said the one per cent cut is double the size of a usual cut of 50 basis points and will release 1.2 trillion yuan (HK$1.27 trillion) of liquidity.

Gross domestic product grew 7.0 per cent in the first quarter, slowing from 7.3 per cent in the fourth quarter of 2014, the National Bureau of the Statistics said on Wednesday. Major economic data all pointed to a slowdown in growth in most key sectors. Imports and exports plunged and growth in industrial output and retail sales slowed in March, raising expectations of more efforts to shore up the economy.

Most economists expected the central bank would move swiftly on further monetary easing soon after the release of the disappointing data.

Analysts said the rate cut would be good news, offsetting the impact of the short selling/margin lending curbs that the state regulator announced on Friday. Stock-index futures tumbled after the China Securities Regulatory Commission  clamped down on the use of shadow financing for equity purchases and increased the supply of shares available for short sellers.

Hong said Sunday’s announcement would also help cushion the blow from the CSRC investigation into umbrella trusts that had caused havoc in overseas markets.

“Overall, it is supportive to the economy and the market, and should be viewed favourably by participants,” Hong said.

The ratio will be cut by another percentage point for rural financial institutions, and two additional percentage points for Agricultural Development Bank.  

 A further 0.5 percentage point will be cut for banks with a certain level of loans to agricultural and small enterprises.

The latest reduction follows a similar move in early February, which was the first across-the-board cut since May 2012. The PBOC has also cut interest rates three times in past six months.

Economists said Sunday’s cut was more targeted in support of small businesses and agriculture.

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