China cut the amount of cash that lenders must set aside as reserves by the most since the global financial crisis just days after a report showed the slowest economic growth in six years.
The reserve requirement ratio (RRR) is to be reduced by 1 percentage point effective today, the People’s Bank of China said yesterday on its Web site.
It is the second rate reduction this year and the largest since November 2008. The level is to decline to 18.5 percent, based on previous statements.
The move follows a pledge from Chinese Premier Li Keqiang (李克強) last month to step in if the economic slowdown hurts jobs and wages. It follows bank Governor Zhou Xiaochuan’s (周小川) recent comments that China has room to act compared with other global central banks.
The cut aims to allow banks to boost lending, unleashing about 1.2 trillion yuan (US$193.68 billion) and might spur a surge in the nation’s booming stock market.
“This RRR cut is much bigger than the market anticipated and banks will be flooded with liquidity,” Hong Kong-based Australia and New Zealand Banking Group Ltd (ANZ) chief China economist Liu Li-Gang (劉利剛) said. “However, it will also add fuel to the already red hot stock market.”
China’s move adds to its own monetary easing and that of about 30 global counterparts this year, as policymakers confront the risk of excessively low inflation. The world’s No. 2 economy also is contending with an outflow of capital and slowing domestic production that threatens the job creation needed to keep urbanization going.
GDP expanded by 7 percent in the three months through last month from a year earlier, the least since 2009, while industrial production last month rose at the slowest rate since November 2008.
An economy-wide inflation indicator turned negative last quarter for the first time since 2009, suggesting room for easing.
“The move is positive, showing policymakers are trying to offset the impact of potential capital outflow and stabilize the macro environment,” Hong Kong-based Morgan Stanley greater China chief economist Helen Qiao (喬虹) said. “The 100 basis point cut shows the intensification of policy easing, which is warranted given the sharp slowdown.”
Banks including Macquarie Group Ltd, HSBC Holdings PLC, and Nomura Holdings Inc flagged the need for further stimulus after the GDP report and last month’s indicators, which also showed an unexpected slump in exports.
The RRR cut is the first major monetary policy adjustment since Li announced a growth target of about 7 percent for this year, which would be the slowest since 1990.
The reserve ratio is to be reduced by another percentage point for rural financial institutions, two additional percentage points for China’s Agricultural Development Bank (中國農業發展銀行) and a further 0.5 percentage point for banks with a certain level of loans to agricultural and small enterprises.
Policymakers are juggling the need to keep growth from slipping too far with plans to press ahead with reforms.
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