World Economy

China to Cut Reserve Ratio Most Since 2008

China to Cut Reserve Ratio Most Since 2008China to Cut Reserve Ratio Most Since 2008

China’s central bank is to cut its bank reserve requirement ratio by one percentage point. The People’s Bank of China said that the new reserve requirement would take effect from Monday.

The aim is to stimulate more lending into the nation’s slowing economy, BBC reported.

The move allows banks to lend out more money, with Chinese state media saying the cut will release 1.2 trillion yuan ($194b) into the world’s second-largest economy.

China’s economy grew by 7% in the first quarter of the year, a large figure by western standards, but the lowest for the country since the financial crisis of 2009.

Last year its growth slowed to its weakest in 24 years, expanding 7.4% in 2014 from 7.7% in 2013. It meant growth in the nation’s economy missed its official annual growth target of 7.5% for the first time in 15 years.

As part of the new measures the Central Bank has also said it will provide various further cuts to reserve requirements for banks providing agricultural financing. The bank had previously cut its reserve requirement two months ago.

While the move was not unexpected and follows Premier Li’s vow last month to actively step in if the economic slow down begins to hurt jobs, as well as the PBOC’s (People’s Bank of China) hint yesterday that the PBOC has room to act, the size of the cut was far bigger than most had predicted.

“This RRR (Reserve Requirement Ratio) cut is much bigger than the market anticipated and banks will be flooded with liquidity,” said Liu Li-Gang quoted by Bloomberg, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “It will also add fuel to the already red hot stock market.”

Other commentators, clearly long “of stocks”, were just as giddy: “The move is positive, showing policy makers are trying to offset the impact of potential capital outflow and stabilize the macro environment,” said Helen Qiao, Hong Kong-based chief greater China economist at Morgan Stanley. “The 100 basis point cut shows the intensification of policy easing, which is warranted given the sharp slowdown.”

And since none of the recent PBOC easing has done anything to arrest the collapse in the all important housing market, more interest rate cuts are forthcoming.

But is it really about the economy? Recall that on Friday Chinese equity futures crashed after the close following news that the China Securities and Regulatory Commission (CSRC) put out an announcement which tightened up rules governing certain trading on margin while simultaneously liberalized rules on short selling.