Beijing — China’s central bank on Sunday announced a steep cut in the level of cash that banks must hold as reserves, stepping up moves to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the US.
The reserve requirement cut, the fourth by the People’s Bank of China in 2018, comes as Beijing has pledged to expedite plans to invest billions of dollars in infrastructure projects as the economy shows signs of cooling further, with investment growth slowing to a record low.
Reserve requirement ratios (RRRs) — now 15.5% for large commercial lenders and 13.5% for smaller banks — would be cut by 100 basis points from October 15, the bank said, matching a similar-sized move in April. Economists predicted further cuts ahead.
Beijing has stepped up liquidity support across the financial system in 2018 as policymakers have focused on calming fears of capital outflows and sought to soothe battered markets even as anxiety grows that a heated trade war with the US could deal a damaging blow to the broader economy.
China’s yuan currency has faced strong selling pressure in 2018, losing more than 8% in March-August at the height of market worries, though it has since cut losses as authorities stepped up support.
Sunday’s move will inject a net ¥750bn in cash into the banking system by releasing a total of ¥1.2-trillion in liquidity, with ¥450bn of that to offset maturing medium-term lending facility loans. The RRR cut, announced on the last day of China’s week-long national day holiday, indicates that the central bank is worried about the impact of "external shocks" to markets such as a speech last week by US vice-president Mike Pence, said Zhang Yi, chief economist at Zhonghai Shengrong Capital Management.
Pence intensified Washington’s pressure campaign against Beijing on Thursday by accusing China of "malign" efforts to undermine US President Donald Trump ahead of November’s congressional elections and reckless military actions in the South China Sea.
Pence’s speech marked a sharper US approach towards China, going beyond the bitter trade war between the world’s two biggest economies, which has magnified concern about the outlook for China’s economy.
Weakening exports were already a drag on growth in the first half of the year after giving an added boost to the economy in 2017, highlighting the need for sustained strength in domestic demand if significant new US tariffs are imposed.
The "very timely" RRR cut is big enough to help boost confidence in the economy, said Xu Hongcai, deputy chief economist at the China Centre for International Economic Exchanges, a Beijing think-tank. "The trade war’s impact on the economy is showing. There is room for further reductions and I expect another one percentage point cut by the year-end."