China cut the amount of cash most banks must keep in reserve, acting to counter the country’s economic slowdown in a move that puts the central bank on a different political path than many of its peers.
The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks on December 15, freeing up 1.2 trillion yuan ($ 188 billion) of liquidity, according to a statement released Monday. . The RRR cut was signaled by Prime Minister Li Keqiang last week, when he said authorities would act at the appropriate time to help smaller companies, and marks the second cut this year.
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The decision comes after an improvement in recent industry and broader economic data, although Beijing’s tighter restrictions on the housing market have led to a drop in construction and worsened a liquidity crisis at real estate firms, including the beleaguered China Evergrande Group. The People’s Bank of China decision was closely followed by a statement from top leaders who pledged to stabilize the economy in 2022, with a Politburo meeting signaling a loosening of some property restrictions.
The message from the Politburo meeting is more important than the RRR cut, “as it indicates that the government can relax policies in the real estate sector,” according to Zhiwei Zhang, chief economist at Pinpoint Asset Management.
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“We believe that the reduction would help offset the headwinds facing the economy, particularly in the first quarter of 2022. We maintain our view that next year there will be an additional 50-100 basis points of RRR reduction.”
David Qu, economist
The Politburo meeting pledged to focus on stabilizing macroeconomic conditions, ensuring that the economy grows in a reasonable range and that society remains orderly ahead of a key Communist Party congress late next year. There will be a proactive fiscal policy in 2022 and prudent monetary policy will be flexible, appropriate and also maintain reasonably ample liquidity, according to the statement from the official Xinhua news agency following the meeting chaired by President Xi Jinping.
Monday’s Politburo meeting will be followed by the Central Economic Work Conference sometime this month, which will develop economic policy plans for next year.
The RRR cut is a “regular monetary policy action,” the People’s Bank of China said, downplaying any expectation that the decision would be the start of a loosening cycle. “The prudent direction of monetary policy has not changed,” he said, adding that the bank “will continue with a normal monetary policy, maintaining the stability, consistency and sustainability of the policy, and will not flood the economy with stimulus.”
With the US Federal Reserve and other global central banks seeking to tighten policy, the easing move by the People’s Bank of China makes the divergence between China and much of the rest of the world even clearer.
The RRR cut will apply to all banks except those already at the lowest 5% level, which are mostly small rural banks, according to the statement. The weighted average ratio for financial institutions will be 8.4% after the cut, down from 8.9% previously, the People’s Bank of China said in a separate statement.
Part of the money released by the RRR cut will be used by banks to repay overdue loans from the People’s Bank of China medium-term line of credit, and a part will be used to replenish the long-term capital of financial institutions, said the central bank. There are nearly 1 trillion yuan in one-year loans due on December 15, the day the cut takes effect.
Even with the deepening of the housing market decline, the authorities had limited themselves to adding new support policies, keeping monetary policy stable and maintaining a measured pace of fiscal spending. However, the People’s Bank of China noted a easing bias in the latest monetary policy report last month, while the State Council urged local governments to speed up spending.
“The objective of the RRR cut is to strengthen the cross-cyclical adjustment, improve the capital structure of financial institutions, increase the capacity of financial services to better support the real economy,” said the People’s Bank of China. The cut will effectively increase long-term capital for banks to serve the real economy, and the People’s Bank of China will guide banks to increase their support for small businesses, he said.
A cut in the reserve ratio does not directly reduce borrowing costs, but it quickly frees up cheap funds for banks to lend. The reduction will reduce the cost of capital for financial institutions by about 15 billion yuan each year, which will lower the overall financial cost of the economy, the People’s Bank of China said.
© 2021 Bloomberg