BEIJING, March 17 (Reuters) – China’s central bank said on Friday it would cut the amount of cash banks must hold as reserves for the first time this year to help keep liquidity plentiful and support a nascent economic recovery.
Chinese leaders have vowed to step up support for the world’s second-largest economy, which is gradually recovering from a pandemic-induced slowdown after corona-related curbs were abruptly lifted in December.
The People’s Bank of China (PBOC) said it would reduce the reserve requirement ratio (RRR) for all banks, except those that have implemented a 5% reserve ratio, by 25 basis points from March 27.
The move, which came earlier than financial markets had expected, follows data showing a gradual but uneven recovery in the economy in the first two months of the year and a stronger-than-expected credit expansion.
“At present, risks in the overseas banking sector are increasing, and global liquidity is under pressure, and the external environment is becoming increasingly complex,” said Wen Bin, chief economist at China Minsheng Bank.
“In the first two months of this year, China’s main economic indicators showed a positive trend, but the overall recovery foundation is not yet solid.”
The central bank has not yet given an estimate of how much long-term liquidity will be released after the cut, which will allow banks to lend more funds.
Analysts estimated the move freed up over 500 billion yuan ($72.6 billion).
The central bank has promised to make its policy “precise and forceful” this year to support the economy, keep liquidity reasonably plentiful and lower funding costs for businesses.
It said the cut reflected its intention to “make a good combination of macro policies, improve service levels for the real economy and keep liquidity reasonable enough in the banking system.”
China’s new Premier Li Qiang has vowed to push the overall economy to improve while fending off major risks, state media reported on Friday.
The reduction follows a 25 bps cut for all banks in December.
‘EFFECTIVE TOOL’
Central Bank Governor Yi Gang told a press conference on March 3 that China’s real interest rates are at an appropriate level and that reducing banks’ reserve requirements will still be an effective tool to support the economy.
The PBOC has cut the RRR 15 times since 2018, from nearly 15%, and some analysts have wondered how much room it has for further reductions.
“This will provide some financial relief for China’s large and medium-sized banks,” Julian Evans-Pritchard of Capital Economics said in a note.
“It may also help lower lending rates slightly. But given the broader signs of policy restraint, we doubt it will have a significant and lasting impact on monetary conditions or credit growth.”
The weighted average RRR for financial institutions stood at around 7.6% after the cut, the central bank said.
China’s economic activity picked up in the first two months of 2023 as consumption and infrastructure investment drove a recovery from COVID-19 disruptions. But its other traditional growth engines are a big question mark: Exports are expected to remain weak amid a global downturn, and the troubled property sector is only slowly beginning to turn around.
China has set a modest target for economic growth this year of around 5%, after cooling to just 3% last year, one of the weakest performances in nearly half a century.
($1 = 6.8912 Chinese Yuan Renminbi)
Reporting by Beijing Newsroom, Ellen Zhang, Liangping Gao and Kevin Yao; Editing by Kim Coghill and Hugh Lawson
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