China’s cabinet said the central bank would cut the amount of money that banks have to keep in reserve at the proper time, a further sign there is likely to be additional monetary stimulus to support the economy.
“China will use monetary policy tools including a RRR cut at an appropriate time, and will step up financial support to the real economy, especially industries and small businesses that have been hit hard by the pandemic,” the State Council said after a meeting Wednesday, according to state-run television. The People’s Bank of China usually announces a reduction within days of the State Council making such a statement.
China’s economic outlook has worsened of late, with the country’s Covid outbreak showing few signs of easing despite an extended lockdown of Shanghai and other cities which is having an increasingly serious effect on supply chains, businesses and people. Premier Li Keqiang on Monday issued a third warning in less than a week about growth risks and promised stronger policies, suggesting heightened concern.
A cut to banks’ required reserved ratio may come soon, according to Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong Ltd. “This could be the last chance for China to make a monetary easing move in the near term before the potential shrinking of the Federal Reserve’s balance sheet.”
While lowering the RRR is an effective way to release cheap long-term liquidity into the economy, the central bank may gradually shift away from its widespread use. PBOC officials have said the room to lower the ratio is much smaller than a few years ago, while economists have pointed to the fact that it’s becoming a less effective tool to deal with the structural challenges facing China.
The State Council said China’s big banks, which have higher levels of provisions to cover potential bad loans, are encouraged to reduce those reserves “in an orderly way.” It didn’t give details or name any lenders.
The PBOC’s easing stance is in sharp contrast to that of other major central banks, like the Federal Reserve, which have hiked interest rates to tame soaring inflation. Economists say China’s central bank has a narrow window in which to ease policy since higher U.S. rates will begin reducing the appeal of Chinese assets and fuel capital outflows.
The PBOC cut the one-year policy interest rate in January, with economists expecting more easing to come in the form of another reduction as soon as Friday. The central bank has pledged to keep policy supportive and boost confidence, with a focus on helping small businesses.
Credit did expand faster than expected in March as local governments and companies accelerated borrowing, but mortgages and long-term corporate lending remained weak. As economic challenges have mounted, major banks including Morgan Stanley and UBS Group AG have lowered their 2022 growth forecasts to well below the government’s ambitious target of about 5.5%.
