Saturday, 19 January, 2019


China to cut reserve requirement ratio by 1 percentage point

China cuts bank reserve requirement to spur economy amid trade war China to cut banks' reserve requirement ratios, taxes
Conrad Doyle | 07 January, 2019, 09:28

Local governments are encouraged to set up financing funds for private enterprises, and supportive tools for equity and bond financing for private firms will also be promoted, according to a statement released Friday after a work conference of the People's Bank of China (PBOC).

The PBoC said on Wednesday that it chose to relax evaluation rules for financial institutions eligible for a lower reserve requirement ratio (RRR) from 2019, in a move to boost lending to small and micro enterprises (SMES).

The moves will free up a net 800 billion yuan (US$116.51 billion) after banks use some of the 1.5 trillion yuan in liquidity released into the financial system to pay back maturing medium-term loans.

In addition to the central bank's numerous support measures, the government has also ramped up spending on infrastructure to rekindle sluggish demand and investment, but the moves will take some time to kick in.

Global stock markets sold off on Thursday after a warning from tech giant Apple Inc about slowing China sales, while data this week showed manufacturing activity shrank in December for the first time in more than two years.

The reserve requirement ratio refers to the percentage of cash that financial institutions are required to place in the central bank as reserves, against the amount of deposits they hold. Zhang Yu, a research director at Huachuang Securities, thinks there could be an RRR cut in mid-January.

The reduction is being made in two equal stages, effective January 15 and January 25, the PBOC said.

On Wednesday, the PBOC changed the definition of a small business, meaning an enterprise with a credit line of less than 10 million yuan will qualify for targeted RRR cuts, up from the previous standard of 5 million yuan. One big wild card is how the trade war between the United States and China will play out in 2019.

"The Chinese economy continues healthy development and stays within a reasonable range", it said. Corporate tax payments and maturities of lenders' interbank debt will also mop up liquidity, prompting authorities to step up cash injections.

Louis Kuijs, chief Asia economist of Oxford Economics, wrote in a note on Friday that China's GDP growth this year could slow to 6.1 per cent from an estimated 6.6 per cent in 2018, and Beijing would rely on policy easing to halt a decline in the growth rate.

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