China economic policy easing ‘would be no surprise’ after Beijing signals rate cut

Move would be the first cut in more than a year, and analysts say it would step up financial support for the economy, which could boost job growth

However, some small and medium-sized enterprises ‘would continue to operate in difficult conditions’ even if banks are encouraged to lend more money, one economist warns

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China’s government has hinted at a monetary policy that would diverge from that of other major economies such as the United States. Photo: AP

Published: 9:30pm, 8 Jul 2021Updated: 11:31pm, 8 Jul 2021

A signalling by China that it might free up more liquidity to banks – by cutting the amount of cash that they must hold in reserve – has taken the market by surprise and reveals new pressures facing the economy in the coming months, according to analysts.

For the first time in over a year, China’s State Council indicated that the reserve requirement ratio (RRR) might be cut, which would step up financial support for the real economy, especially small and medium-sized enterprises.

Cutting the RRR would free up more cash that has been set aside at People’s Bank of China (PBOC), allowing banks to lend more.

However, analysts said they do not expect another large-scale monetary easing cycle to emerge in the second half of the year, and the effects of policymakers’ latest move could be isolated to helping smaller companies – those heaviest hit by the rising costs of raw materials – and would not have as great of an impact on bigger companies.

The move also comes as the Chinese government has hinted at a monetary policy that would diverge from that of other major economies such as the United States, which has started discussing interest rate hikes and a timetable for quantitative easing tapering in its post-pandemic recovery.

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