China cuts bank reserve requirement ratio

The People's Bank of China has cut its required reserve ratio by 50 basis points, in a move to pump liquidity into its stuttering economy.

Cutting the reserve ratio frees up capital by lowering the amount of back-up funds banks must hold with the central bank, a move the PBOC has now made five times since November 2014.

The central bank said the new cut would be effective from 1 March and was aimed at providing banks with ample liquidity and keeping credit growth stable.

After this cut, the RRR for major banks will be at 17.0%, underlining the PBOC's much repeated message recently that policymakers still have room to support the economy.

But before this adjustment, January had seen strong levels of lending from China's banks, which extended a record 2.51trn yuan of new loans, beating analysts’ estimates of 1.9trn yuan. The previous month banks granted 597.8bn yuan of new loans.

Given this strong credit and the fact that domestic interest rates have remained low and stable, the bank may not have been easing but just adjusting to reflect a drop in reserves.

As well as loosening the reserve ratio several times last year, the PBOC has been intervening in the country's currency against the US dollar, setting another lower fix in January, following several similar moves in the second half of 2015.

Capital Economics' Asia chief Mark Williams said the central bank had paused monetary loosening in recent weeks, apparently on concerns that it would worsen capital outflows.

"Today’s cut to the required reserve ratio is therefore both confirmation that policymakers retain a bias easing and also a signal that they are less concerned about outflows getting out of control."

He added that the fact that domestic interest rates have remained low and stable through recent weeks of heavy foreign exchange intervention suggested that policymaker's dilemma was less of a challenge than many believe and that the PBOC was more relaxed about outflows than a few weeks ago.

Philip Uglow, chief economist at MNI Indicators, suggested China made the right move: “Given the continued slowdown in the Chinese economy, it was not too surprising to see the central bank step in once again and loosen policy. The reserve requirement still remains at a relatively high level and there is plenty of room for more easing if needed.

"Our own survey data showed a significant weakening in February, with the MNI China Business Sentiment Indicator dipping below the all-important 50 mark. The Westpac MNI China Consumer Sentiment Indicator also turned lower in February, clouding the outlook for spending over the coming months.”