China central bank urges further domestic lending

China's central bank loosened requirements for lenders, it said in an unscheduled announcement on Friday.

The People’s Bank of China said it would be cutting the required reserve ratio for banks by 0.5 percentage point on 15 January, reducing the cash that banks have to hold as reserves for the fifth time in 12 months, with a further 0.5 percentage point cut on 25 January.

The PBoC said the cut will release a net 800bn yuan ($116bn) of liquidity for new lending.

Chinese premier Li Keqiang, according to an earlier government statement, also visited the country's three biggest commercial banks to urge them to use the fresh reserve loosening to increase financing for small and privately-owned businesses.

Li said China will strengthen the scale of its counter-cyclical adjustments of macro policies and further cut taxes, the government said.

Cutting the required reserve ratio is partly about managing liquidity ahead of Chinese New Year in early February, said economist Mark Williams at Capital Economics. "But it should also provide support for the economy. Policy easing will be stepped up further over coming months."

He sais about half the released liquidity will offset the contractionary effect of injections under the medium-term lending facility that expire soon, with the RRR cut also intended to “reduce financing costs”.

Noting that the message of the Economic Work Conference in December was that policy support will be stepped up, Williams added: "The consistently downbeat tone of the data released since then will only have underlined the strains the economy is facing. We suspect the next major – and still not broadly anticipated – step will be a cut to benchmark lending rates. But with credit growth still slowing and, typically, a six-month lag before any turnaround in credit affects the economy, worries about the outlook for China will persist for several months yet."

In other economic news from the People's Republic, data showed that China's services sector expanded at a slightly faster pace in December.

The Caixin China services purchasing managers' index ticked up 53.9 in December from 53.8 in November, beating expectations for a reading of 52.9.