China’s reserve requirement ratio cut ‘better late than never’, set to release US$70 billion to boost economy
- People’s Bank of China confirmed a 0.25 percentage point reduction to the reserve requirement ratio on Friday
- The decision was within expectations, but comes at a time when the world’s second-largest economy is facing a new round of coronavirus disruptions
China’s central bank cut the amount of cash that banks must hold in reserve for the second time this year on Friday to shore up the coronavirus-hit economy, a move which analysts said is “not too late”, but also that Beijing still needs to roll-out more supportive policies.
The People’s Bank of China (PBOC) said the 0.25 percentage point cut of the reserve requirement ratio (RRR) to 7.8 per cent will take place on December 5 and inject around 500 billion yuan (US$70 billion) in long-term liquidity.
The decision, which was within expectations, comes at a time when the world’s second-largest economy is facing a new round of coronavirus disruptions, with daily infections having already jumped to more than 31,000.
“The impact of the Covid-19 outbreaks is already quite damaging. The RRR cut is reasonable,” said Iris Pang, chief economist for Greater China at ING.
She added that the RRR cut was “not too late”, but that it needs to be accompanied by other less conventional monetary policy to boost its effectiveness, especially when it comes to tackling financing problems for small retailers and companies operating in the catering sector.
Pang added that the PBOC could instruct banks to lend more, while the central bank could also increase loan to banks via relending programmes to boost funding to small- and medium-sized firms.
“Epidemic prevention is now the biggest constraint on the economy,” said Larry Hu, chief China economist at Macquarie Group.
“But the RRR cut is better late than never. The move may now also encourage banks to lend to the real estate sector.”
The PBOC said that the move was aimed at maintaining “reasonable and sufficient liquidity” to support the economy at a “reasonable” growth rate, while reiterating that it would not engage in “flood-like” stimulus.
“[The RRR cut will] increase the long-term stable funding sources of financial institutions, enhance the capital allocation capabilities of financial institutions, and support industries and small, medium and micro enterprises that have been severely affected by the epidemic,” the central bank added.
The cut will also save around 5.6 billion yuan per year for banks in terms of their funding costs, the PBOC added.
But Zhang Zhiwei, chief economist at Pinpoint Asset Management, said the size of the cut shows that China’s monetary policy has been constrained by the US Federal Reserve’s interest rate increases, which have weakened the yuan significantly since the start of the year.
“[The RRR cut] helps marginally, but the main problem for the economy is not the monetary policy,” Zhang said, adding that more action is needed to minimise the impact of China’s virus control measures.
China has eased its containment measures, including cutting quarantine requirements for international arrivals, but there is still no timetable for a complete exit from Beijing’s zero-Covid policy.
“The reduction in the required reserve ratio that the PBOC just announced will help banks follow through on a directive to defer loan repayments from firms struggling with widening lockdown restrictions,” said Mark Williams, chief Asia economist at Capital Economics.
“Market interest rates may also edge down as a result, even if that’s not the main goal. But few firms or households are willing to commit to new borrowing in this uncertain environment. A small fall in interest rates wouldn’t make a difference.”