China’s central bank has stepped up action to bolster its cooling economy by loosening the rules on banks’ cash reserves in the hope that they will offer cheaper loans.
By cutting the reserve requirement ratio (RRR) – the amount of cash that banks must hold as reserves – the People’s Bank of China has in effect injected $100bn (£72bn) of long-term cash into the economy, experts said.
The central bank hopes its cut, effective from 1 March, will boost liquidity in the financial sector, following signs that the world’s second-biggest economy is continuing to slow.
The move, which came as a surprise to many investors, would stabilise the Chinese financial system, said Duncan Innes-Ker of the Economist Intelligence Unit. But it would not be enough on its own.
“The latest cut in the RRR shows the central bank straining to maintain loose monetary conditions in a difficult economic climate,” he said. “The move will partly offset the effects of capital outflows from China and the provisioning requirements that are forcing banks to lock up more funds as non-performing loans climb.
“However, the surge in loans in January highlighted concerns that bank lending may be spiralling out of control. Ultimately, China’s economy cannot grow on credit alone. It needs further reforms to unlock productivity growth.”
A series of interventions by policymakers, including interest rate cuts, have done little to revive growth in China, which at 6.9% last year was its slowest rate for 25 years. In some cases such moves have served only to heighten concern about the country’s challenges.
There have been six interest rate cuts since November 2014 and Beijing has also resorted to a variety of other methods to encourage growth and expand credit, such as increasing bank liquidity and massaging reserve requirements.
The latest cut to the RRR is the fifth in a year. Philip Uglow, chief economist at the financial data firm MNI Indicators, said further cuts could lie ahead.
“Given the continued slowdown in the Chinese economy, it was not too surprising to see the central bank step in once again and loosen policy,” he said. “The reserve requirement still remains at a relatively high level and there is plenty of room for more easing if needed.”
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