China's bank reserve ratio cut targets two birds with one stone

The People's Bank of China's first universal cut in banks' reserve requirement ratios (RRR) in nearly two years was a stone targeting at least two birds.

One is the strong signalling effect that will boost market confidence in the mainland's business and economic outlook by ensuring adequate liquidity, while the other is stemming continued capital flight and defending yuan stability, analysts say.

While the direct impact of the RRR cut on bank lending was limited, and the timing was in part linked to robust cash demand before the Lunar New Year, such an across-the-board move sent "a much stronger signal of broad policy intentions", said Mark Williams, Asia economist with Capital Economics.

For most of last year, despite the risks of economic growth sinking to multi-decade lows, the government largely resorted to targeted easing to spur growth in selected sectors until it was prompted to cut interest rates for the first time in two years in November as company funding costs kept soaring.

Williams said the monetary stance had turned "more accommodative" since the interest rate cut. He said he expected three more RRR cuts this year and two interest rate cuts by the middle of the year.

Ma Jun, chief economist at the PBOC's research bureau, told state media that the RRR cut was partly aimed at coping with "relatively big downside pressures facing the economy", noting persistent manufacturing and property investment weakness.