China cuts banks’ reserve requirements in latest effort to boost economy amid US trade war

Frank Tang

China’s central bank announced on Friday that it will cut the required reserve ratio for all commercial banks, freeing up long-term funding of around 900 billion yuan (US$126 billion) that banks can use to increase lending and support government efforts to shore up the real economy.

The 0.50 percentage point cut in the amount of reserves banks are required to hold at the central bank will be effective from September 16, the People’s Bank of China (PBOC) said.

The required reserve ratio cut would boost bank’s lending capacity and more importantly lower their cost of capital received from the central bank.

The PBOC also cut the reserve requirement by an additional full percentage point for city commercial banks operating in Chinese provinces. The first half will take effect from October 15, with the second taking place a month later, China’s central bank added.

E Yongjian, a senior researcher at the Bank of Communications, said the strong policy action reflects current economic difficulties and rising external uncertainties.

“As seen from the falling [official] purchasing manager’s index and other … data, [the outlook for] August economic activity is not optimistic,” he said.

The rate cuts by central banks worldwide also encouraged the PBOC to take further easing actions as “it paves the way to lower the rate of medium-term lending facility,” the researcher added.

The larger reserve requirement cut for urban banks follows a larger cut for rural banks in the previous reserve requirement reduction in May. Then, the ratio for county-level rural banks and higher level rural banks with county-level branches but total assets of less than 10 billion yuan (US$1.4 billion) was cut 2.5 percentage points.

The latest cut in banks’ reserve requirement was the third this year. After the cuts, the required reserve ratio will be 13 per cent for large banks, and 11 per cent for medium and small-sized banks. The rate will be even lower at 10 per cent and 7.5 per cent, respectively, for city commercial banks and county-level banks.

The [reserve requirement cut] cuts could help bring down banks’ funding costs, and more significantly the money released will be long-term funds. Therefore, banks will have stronger incentives as well as confidence to lend to [small and medium-sized enterprises]

The moves came after the government announced earlier this week its intention to increase economic stimulus measures, as the world’s second largest economy faces increasing downward pressure amid the escalating trade war with the United States.

At its executive meeting on Wednesday, the State Council chaired by Premier Li Keqiang ordered more investment and credit support to boost the economy, explicitly mentioning cutting banks’ reserve requirements as well as reducing market interest rates.

The market is expecting the PBOC to cut the interest rate on its medium-term lending facility, which provides funding to the interbank market, later this month, which would further reduce lending costs.

“The [reserve requirement cut] cuts could help bring down banks’ funding costs, and more significantly the money released will be long-term funds. Therefore, banks will have stronger incentives as well as confidence to lend to [small and medium-sized enterprises]”, said Chaoping Zhu, JPMorgan Asset Management Global Market Strategist.

Wen Bin, chief macro analyst at China Minsheng Banking Corporation, said he expected the PBOC’s new Loan Prime Rate – calculated based on the interest rates that 18 designed banks charge their best customers – to be lowered by 5 basis points when it is set again on September 20 as a result of the lower market rates.

Given that the headwinds to China’s economy from weaker external demand and cooling property construction are likely to intensify in the coming months we doubt the PBOC will stop at just one [reserve requirement] cut

Julian Evans-Pritchard

Analysts expect further moves by the PBOC to reduce interest rates and increase lending to boost the economy.

“Given that the headwinds to China’s economy from weaker external demand and cooling property construction are likely to intensify in the coming months we doubt the PBOC will stop at just one [reserve requirement] cut,” said Julian Evans-Pritchard, senior China economist at Capital Economics. He predicted two more reserve requirement cuts by early next year, along with a decline in the market interest rate of 0.75 percentage point.

Still, the easing of Chinese monetary policy is unlikely to stabilise economic growth in the near term.

“The upshot is that the ongoing shift towards a more accommodative monetary stance is unlikely to prevent a further slowdown in growth nor subsequently drive a strong rebound,” Evans-Pritchard said.

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