China cuts bank reserve requirement to shore up growth

Beijing

CHINA'S central bank cut the amount of cash that banks must hold as reserves on Wednesday, the first industry-wide cut in more than 21/2 years, as it increased efforts to shore up flagging growth in the world's second-largest economy.

The move, which came less than three months after China also cut interest rates for the first time in over two years, was widely expected by investors, who had bet that monetary policy had to be further loosened to lift economic growth from a 24-year low.

The reserve requirement ratio, or RRR, would be lowered by 50 basis points, the People's Bank of China (PBC) said in a statement. The cut is effective from Feb 5 and will take the RRR for big banks to 19.5 per cent. "The move was in line with expectations," said Wen Bin, senior economist at Minsheng Bank in Beijing. "Capital outflows and yuan depreciation have led to net FX sales in recent months. The central bank has tried to use short-term policy tools to inject more liquidity, but such tools look not enough, so it has to cut RRR." He said that he did not expect more policy moves in the first quarter.

Underscoring the Chinese government's concerns about slackening economic growth, the central bank said that the RRR would be lowered by an additional 50 basis points for urban and rural commercial banks that lend to small and medium-sized companies.

The reserve ratio for China Agricultural Development Bank, a bank that lends at the behest of the government to support its policies, would be lowered by an additional 400 basis points, the central bank said.

Some analysts said that the latest policy easing may have been triggered by an official survey of China's mammoth factory sector that showed it shrank unexpectedly for the first time in nearly 21/2 years in January. The survey is known as the Purchasing Managers Index, or PMI. "The main reason was that the PMI was much lower than expected in January, so if there is no further policy reaction, it's very likely that China's Q1 GDP growth could fall below 7 per cent," said Liu Li-gang, an economist at ANZ.

China cut the RRR for some banks earlier this year, but this was the first broad-based change in the ratio since a 50 basis point cut in May 2012. It came after the central bank announced a surprise cut in benchmark interest rates in November after a run of data showing the economy losing momentum.

China's economic growth slowed to 7.4 per cent in 2014 - the weakest in 24 years - from 7.7 per cent in 2013. The economy faces formidable headwinds into 2015 as a property downturn persists, while companies will continue to struggle to pay off debt and export demand may remain erratic. REUTERS