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China slashes banks' reserve requirements again as growth slows

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CHINA'S central bank said on Friday it was cutting the amount of cash that banks have to hold as reserves for the fifth time in a year, freeing up US$116 billion for new lending as it tries to reduce the risk of a sharp economic slowdown.

Beijing

CHINA'S central bank said on Friday it was cutting the amount of cash that banks have to hold as reserves for the fifth time in a year, freeing up US$116 billion for new lending as it tries to reduce the risk of a sharp economic slowdown.

The move comes amid mounting worries about the health of the world's second-largest economy, which is facing both slowing demand at home and punishing US tariffs on its exported goods.

Global stock markets sold off on Thursday after a warning from tech giant Apple Inc about slowing China sales, while data earlier this week showed the country's manufacturing activity shrank in December for the first time in over two years.

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The announcement came just hours after Premier Li Keqiang said that China would take further action to bolster the economy, including reserve requirement ratio (RRR) cuts and more cuts in taxes and fees, highlighting the urgency to cope with increased growth headwinds.

"This speedy RRR cut with great intensity fully demonstrates the determination of policymakers to stabilise growth," said Yang Hao, an analyst at Nanjing Securities. "At present, the economy is facing very big downward pressure amid internal and external troubles."

The cut in RRR is the first in 2019 by the People's Bank of China (PBOC). It cut the ratio for all banks, freeing up a net 800 billion yuan (S$158.6 billion) after lenders use some of the 1.5 trillion yuan in liquidity released to pay back maturing medium-term loans.

The size of the move was on the upper end of market expectations, and the net funds released would be the largest amount in the five cuts since last January.

"Policy easing will be stepped up further over coming months," Capital Economics said in a research note. "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."

RRRs - currently 14.5 per cent for large institutions and 12.5 per cent for smaller banks - will be lowered by a total of 100 basis points in two stages, the PBOC said.

The cuts will be effective Jan 15 and Jan 25, ahead of the long Chinese New Year celebrations when cash conditions often get tight.

More help coming

Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed China's economy was continuing to lose steam amid increased signs of a pinch from the trade war with the United States.

The central bank said that China's growth was still within a reasonable range and it would continue to implement a prudent monetary policy, without engaging in massive stimulus.

"We will maintain reasonable and sufficient liquidity, maintain reasonable growth in the scale of money and credit and social financing, stabilise macro-leverage and seek internal and external balances," it said.

Analysts say that Beijing will have to keep up a relatively steady stream of stimulus to engineer a sustainable economic turnaround.

But they note policy transmission difficulties faced by the central bank to boost credit for private and small firms - which are vital for economic growth and jobs.

Cutting benchmark interest rates may be a last-resort option as that could weigh on the yuan currency and fuel debt risks in the economy, analysts say.

Economists believe the government could take more fiscal steps by cutting taxes and boosting spending on infrastructure projects, amid expectations that the annual budget deficit ratio could be lifted to 3 per cent in 2019 from 2.6 per cent last year.

Still, China's economic growth is expected to have cooled to around 6.5 per cent last year - which would be the weakest since 1990 - in line with Beijing's target but down from 6.9 per cent in 2017.

A further deceleration is seen this year, with some analysts forecasting growth will cool to just over 6 per cent. REUTERS