China Cuts Reserve Requirement Ratio for Second Time This Year - BLOOMBERG
SEPTEMBER 14, 2023
(Bloomberg) -- China’s central bank cut the amount of cash lenders must hold in reserve for the second time this year, in a move which will help banks support government spending to stimulate the slowing economy.
The People’s Bank of China lowered the reserve requirement ratio for most banks by 25 basis points, according to a statement Thursday. The weighted average RRR for banks will be 7.4% after the reduction, the statement says.
The cut, which takes place from Friday, aims to boost banks’ lending capacity and “facilitate fiscal stimulus,” especially local government bond issuance, said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.
China’s local governments have been rushing to issue their quota of so-called “special” bonds used mainly to finance infrastructure projects before a September deadline. Provincial governments sold the biggest amount of special bonds in more than a year in August, according to Bloomberg calculations.
As banks dominate China’s bond market, large-scale government bond issuance can lower their liquidity. The cut will help maintain “reasonably ample” liquidity in the banking system, the PBOC said in the statement.
China’s post-Covid recovery has been losing momentum since a rebound in the first quarter, with July data showing a large drop in property sales and slower consumer spending. Some more recent indicators including inflation and exports point to a potential stabilization in the economy, though most economists think the impact from recent stimulus and property easing measures won’t be seen until later this year.
An RRR cut was expected for September because of the large amount of special bond supply set to hit the market this month, said Bruce Pang, chief economist and head of research for greater China at Jones Lang LaSalle Inc. The move may mean the PBOC delays lowering interest rates, he said.
The PBOC “will likely wait and see the Fed’s next rate decision before itself takes further action,” Pang said. “It may also want to assess the effect of its last rate cut, which was delivered just a month ago.”
The PBOC in August stepped up policy support with a surprise reduction to the rate on its one-year loans — or medium-term lending facility — the second cut this year. Most economists expect the PBOC to keep the rate unchanged when it next announces it on Friday.
Policymakers’ next step to support growth is expected to be a “more proactive” fiscal policy, possibly in the fourth quarter, according to Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.
“Next year, most likely fiscal policy will become more aggressive,” Zhang said.
The PBOC last lowered the reserve ratio by 25 basis points for most banks in March. A reduction in the ratio frees up cheap long-term cash for banks, allowing them to extend more loans to businesses and consumers, and to buy more bonds.
The government set a fairly conservative economic growth target of around 5% for this year, which economists expect Beijing will meet.
--With assistance from Yujing Liu, Tom Hancock and Fran Wang.
(Updates to add quote in third paragraph, bond issuance in fourth paragraph.)