Canadian Manufacturing

China reduces bank reserve requirements to boost cash flow

The reduction is the second in just over four months, following a similar 0.5 per cent point cut in October 2015



BEIJING—In a step to shore up slowing economic growth, China freed up more money for lending by cutting the amount its banks are required to hold in reserve.

The move follows declarations by Chinese leaders that they have room to boost growth despite concern in global financial markets about capital outflows and stock and currency turmoil.

The amount of deposits commercial lenders will be required to leave with the central bank will be cut by 0.5 percentage points on March 1, the central bank announced. That would reduce reserve levels for the country’s major state-owned banks to 17 per cent of deposits—still by far the world’s highest level.

“The aim clearly is to support the economy at a time when downward pressures on growth remain strong and uncertainty is elevated,” Louis Kuijs of Oxford Economics said in a report. “This move suggests that for China’s policymakers, growth remains key.”

The reduction is the second in just over four months, following a similar 0.5 per cent point cut on Oct. 23.

It followed a Feb. 29 declaration by Premier Li Keying, the country’s top economic official, to global finance ministers meeting in Shanghai that China has “potential, resilience and flexibility” to deal with economic challenges.

China’s economic growth fell last year to a 25-year low of 6.9 per cent and is forecast to fall further this year.

Beijing’s room to manoeuvr has been reduced by turmoil over China’s currency, the yuan, since the surprise introduction of a new mechanism for setting the state-controlled exchange rate last Aug. 12.

The yuan has slid in value since then, prompting an outflow of capital that spiked to a record $135 billion in December. An interest rate cut to perk up economic growth would make the yuan even less attractive, possibly fueling further outflows.

“Today’s move suggests that concerns about capital flows have eased,” Mark Williams of Capital Economics said in a report. “It may be that the PBOC senses that speculative pressure has diminished or that closer monitoring of capital flows has helped slow the flow.”

The move also suggests Chinese leaders are less concerned about excessive lending following strong credit growth in January. That prompted concern they might tighten controls to prevent a run-up in already high debt levels.

“A further acceleration of credit will only deepen concerns about bad debt and over-investment. But these are issues for the medium term,” said Williams. “For now, the emphasis is on shoring up growth in the near term.”

Related Posts from the network