China to cut reserve requirement ratio by 1 percentage point

China cuts bank reserve requirement to spur economy amid trade war

China will cut banks' reserve requirement ratios (RRRs), taxes and fees, Premier Li Keqiang said on Friday, as the world's second-largest economy slows.

China's new yuan-denominated loans stood at 1.25 trillion yuan (£143.14bn) in November, up from 697bn yuan in October, and it was 126.7bn yuan more than that recorded in the same period previous year, according to the PBOC data.

Just how badly is China's economy doing? Lowering the ratio is expected to boost lending.

"It is hard to clearly understand the overall policy effect as every institution has to make their own calculations", said Ding Shuang, chief Greater China economist at Standard Chartered Bank.

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If a bank can prove it has followed instructions from the central bank, including lending more to small businesses, it will be allowed to place smaller reserves at the PBOC so that it will then have more funds to lend.

The PBoC will probably inject cash by conducting "sizeable" reserve repurchase agreements with banks and lower the RRR in January, according to a note from Huachuang Securities Co Ltd.

China's top leaders have pledged to keep monetary policy prudent while striking an "appropriate" balance between tightening and loosening in 2019, part of the steps to ratchet up stimulus to support growth.

According to numbers China released earlier this week, factory activity declined in December for the first time in more than two years, suggesting that the business environment is likely to become worse.

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China's leadership has emphasised the need to "stabilise" growth and employment in 2019, and the central bank is a key institution to achieve this.

Wen Bin, an economist at China Minsheng Banking, said that the central bank needed to cut the RRR continuously to provide liquidity to the economy at a time when China's trade surplus and capital inflows, the traditional sources of domestic liquidity, were in danger of drying up.

"The cut should be seen as a targeted adjustment, rather than flooding the financial system", the PBOC said in a separate explanatory filing that emphasized it was not altering the "moderate stance" of China's monetary policy.

The People's Bank of China (PBOC) will likely release a significant amount of funds in order to meet the upcoming liquidity crunch such as through RRR cuts and providing funding for lenders who make loans to private companies.

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The central bank said it believes the latest move could "guide" banks to lend more to small and tiny businesses.

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