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Markets
CHINA CUTS BANK RESERVE REQUIREMENTS TO AID FISCAL STIMULUS
* Second reduction in 2023 will help banks digest bond issuance
* Move may help PBOC delay lowering interest rates, analyst says
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By Bloomberg News
September 14, 2023 at 12:30 PM GMT+2
Updated on
September 14, 2023 at 2:23 PM GMT+2
Listen
3:10
China’s central bank cut the amount of cash lenders must hold in reserve for the
second time this year, a move that will help banks support government spending
to stimulate the slowing economy.
The People’s Bank of China lowered the reserve requirement ratio for most banks
by 25 basis points, according to a statement Thursday. The weighted average RRR
for banks will be 7.4% after the reduction.
The cut, which takes place from Friday, aims to boost banks’ lending capacity
and “facilitate fiscal stimulus,” especially local government bond issuance,
said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.
China’s local governments have been rushing to issue their quota of so-called
“special” bonds used mainly to finance infrastructure projects before a
September deadline. Provincial governments sold the biggest amount of special
bonds in more than a year in August, according to Bloomberg calculations.
As banks dominate China’s bond market, large-scale government bond issuance can
lower their liquidity. The cut will help maintain “reasonably ample” liquidity
in the banking system, the PBOC said in the statement. The reduction could free
up 450-500 billion yuan ($55-69 billion), according to Pantheon.
China’s post-Covid recovery has been losing momentum since a rebound in the
first quarter, with July data showing a large drop in property sales and slower
consumer spending. Some more recent indicators including inflation and exports
point to a potential stabilization in the economy, though most economists think
the impact from recent stimulus and property easing measures won’t be seen until
later this year.
An RRR cut was expected for September because of the large amount of special
bond supply set to hit the market this month, said Bruce Pang, chief economist
and head of research for greater China at Jones Lang LaSalle Inc. The move may
mean the PBOC delays lowering interest rates, he said.
The PBOC “will likely wait and see the Fed’s next rate decision before itself
takes further action,” Pang said. “It may also want to assess the effect of its
last rate cut, which was delivered just a month ago.”
The PBOC in August stepped up policy support with a surprise reduction to the
rate on its one-year loans — or medium-term lending facility — the second cut
this year. Most economists expect the PBOC to keep the rate unchanged when it
next announces it on Friday.
Policymakers’ next step to support growth is expected to be a “more proactive”
fiscal policy, possibly in the fourth quarter, according to Zhang Zhiwei, chief
economist at Pinpoint Asset Management Ltd.
“Next year, most likely fiscal policy will become more aggressive,” Zhang said.
The PBOC last lowered the reserve ratio by 25 basis points for most banks in
March. A reduction in the ratio frees up cheap long-term cash for banks,
allowing them to extend more loans to businesses and consumers, and to buy more
bonds.
The government set a fairly conservative economic growth target of around 5% for
this year, which economists expect Beijing will meet.
“The move suggests that the PBoC’s monetary policy easing could stay bold in the
remainder of this year,” said Becky Liu, head of China macro strategy at
Standard Chartered Plc. The bank may further cut RRR and policy rates in the
fourth quarter, with banks possibly lowering loan rates for prime customers next
week, she added.
— With assistance by John Liu, Yujing Liu, Tom Hancock, and Fran Wang
(Updates to add liquidity freed up in fifth paragraph, analyst quote in last
paragraph.)
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