[BEIJING] China's leaders swung into stimulus mode, cutting the amount of cash lenders must set aside as reserves by the most since the global financial crisis just days after a report showed the slowest economic growth in six years.
The reserve-requirement ratio was lowered 1 percentage point effective Monday, the People's Bank of China said. While that was the second reduction this year, the new level of 18.5 percent is still high by global standards.
The move puts China more firmly in the easing camp with the European Central Bank and the Bank of Japan and follows a vow by Premier Li Keqiang to step in if the economy's slowdown hurts jobs as well as PBOC Governor Zhou Xiaochuan's weekend comment that China has room to act. The cut will allow banks to boost lending, unleashing about 1.2 trillion yuan (US$194 billion).
"Banks will be flooded with liquidity," said Liu Li-Gang, 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." Equities were weighed early Monday after the regulator on Friday moved to cut leveraged trading and expand short selling. Interest-rate swaps declined to the lowest level since 2012, while the Australian dollar advanced.
The reduction adds to the PBOC's own monetary easing and that of about 30 counterparts around the world this year as policy makers confront the risk of excessively low inflation.
Gross domestic product expanded 7 per cent in the three months through March from a year earlier, the least since 2009, while industrial production in March rose at the slowest rate since November 2008. Foreign-exchange reserves dropped the most on record last quarter, fueling speculation the central bank sold holdings to support the yuan as money flowed out of China.
"The PBOC's easing remains 'defensive' in nature," said Stephen Jen, co-founder of hedge fund SLJ Macro Partners LLP in London and former head of currency research at Morgan Stanley. "Capital outflows have continued, and this has led to a contraction in China's base money. To offset this, the PBOC needed to take actions to increase the money multiplier." Lu Lei, head of the PBOC's research department, said that while the reserve-ratio cut gives banks more low-cost cash at their disposal, the "real financing cost remains at a high level" given the decline in producer prices, according to the official Xinhua News Agency. China will continue with prudent monetary policy and put special emphasis on fine-tuning, Lu said in the Xinhua report.
Li and President Xi Jinping are seeking to rein in the excesses of a three-decade-long economic boom that lifted millions out of poverty while polluting skies and rivers, generating industrial overcapacity and a debt pile that threatens the nation's continued expansion. Some of their platform, such as a crackdown on corruption and state largess, is putting a brake on short-term economic growth.
Policy makers earlier this year unveiled a 1 trillion yuan program letting local governments sell bonds to replace bank loans made during a record credit binge unleashed during the 2008-2009 global crisis. The PBOC is considering letting banks use those bonds as collateral for low interest-rate, three-year loans, with the objective of channeling credit to areas including agriculture and small and medium enterprises, according to the Wall Street Journal, which cited people familiar with the talks.
The government will expand and accelerate investment in infrastructure and public goods financed by its policy banks, said Wang Tao, chief China economist at UBS Group AG in Hong Kong. She flagged an increased role for China Development Bank Corp, the nation's biggest policy lender.
Among the steps already taken by the PBOC to shore up lending is a short-term credit program called the medium-term lending facility, through which it made 370 billion yuan available in the first quarter, it said on April 10.
"Policy makers are quite concerned," said Larry Hu, head of China economics at Macquarie in Hong Kong. He expects an interest-rate cut within a month, increasing infrastructure spending and a further relaxation of home-purchasing rules.
The reserve ratio will be reduced by another percentage point for rural financial institutions, two additional percentage points for Agricultural Development Bank and a further 0.5 percentage point for banks with a certain level of loans to agriculture and small enterprises.
Those extra reductions give the move a "reformist flavor," wrote Bloomberg economists Tom Orlik and Fielding Chen. Still, with growth weak and small companies most at risk, it's understandable banks see state-owned firms as safer bets.
"As ever, the price of stronger growth is slower progress on structural reform," they wrote.