China's central bank has reduced the total amount of cash that banks need to lock away as policy-makers in the world's second-largest economy try desperately to boost growth as factories close down and worries mount about the country's broader economic transition.
Announced by the People's Bank of China (PBOC) over the weekend, the decision effectively prioritized growth over longer-term stability, lowering by 50 basis points the reserve requirement ratio (RRR) for major banks to just 17 per cent. That means Chinese banks now need to hold a lower percentage of their total assets as cash on hand, freeing them to lend more money and generate economic activity. Economists estimate the central bank's cut will free up about $105-billion (U.S.), which could be injected back into China's decelerating economy as officials in Beijing continue to attempt a shift from export-led manufacturing to more sustainable domestic consumption.
"The aim clearly is to support the economy at a time that downward pressures on growth remain strong and uncertainty is elevated," said Louis Kuijs, who leads Asia research at Oxford Economics in Hong Kong.
The move surprised most observers, and came just after a G20 meeting in Shanghai in which Chinese officials pledged to help usher in a more predictable fiscal and monetary regime, as well as not to again devalue its currency – after a sharp 2-per-cent devaluation of the yuan last year roiled global markets, undercut faith in Chinese leaders' ability to manage the economy and raised fears about a potentially destabilizing currency war in Asia. It also showed, economists said, that Chinese policy-makers remain convinced of the need for further intervention to maintain growth at a time when GDP growth is slipping, and are somewhat less concerned about the risk of capital outflows and medium- to long-term problems, such as propping up "zombie" companies that stumble on despite mounting debts.
"The move is unexpected after the announcement that the PBOC would conduct daily open market operations," said Iris Pang, senior economist for Greater China at Natixis Asia Research. "This reflects the central bank is keen to ease liquidity in the China banking sector. The central bank may then need more window guidance to commercial banks to ensure this additional liquidity would not be directed to save zombie corporates in overcapacity industries."
China's top leaders have struggled over the past couple of years with exactly how to keep the enormous economy humming, while simultaneously shifting growth away from the manufacturing that has powered the country's rise. Red-hot GDP growth has gradually come down from highs of 9.5 per cent in 2011 to estimates in the range of 6.5 per cent for 2016 and between 6 per cent and 6.5 per cent in 2017, though some economists doubt the official data and suggest growth is even lower. That slower growth has reduced China's need for raw resources, which in turn has knocked down the price of everything from crude oil to iron ore and coal, hitting growth in commodity-dependent economies from Canada to Venezuela. With that stagnant global growth now squeezing the demand for Chinese exports, and rising wages driving a lot of lower-cost work deeper into less-developed Southeast Asian economies, Beijing has been left with emptying factories and a worrying excess of capacity.
The PBOC's cut also comes shortly before the annual meeting of China's parliament. "I see this as a tactical adjustment before the opening of the twin parliamentary sessions," said Yves Tiberghien, the head of the University of British Columbia's Institute of Asian Research. "It seems to be that this is a higher level political decision, possibly in order to soften the blow of the ongoing economic transition and deceleration in industry and real estate sectors."
On Monday, equity markets again slumped in Shanghai and Shenzhen – reinforcing the perception that China's stock market remains volatile as policy-makers continue to intervene. Chinese markets fell dramatically in the new year, and another slump at the end of February erased the 10-per-cent gain made from lows in January. "The recent sell-off in stock market is definitely another reason behind today's policy move," said economist Hao Zhou of Commerzbank AG in Singapore.
This is China's fifth such move to cut the reserve ratio in about a year, and some economists also doubt it will be the last as Beijing continues to tinker with the levers at its disposal.
"We continue to expect one more RRR cut by the end of [the second quarter] and also think the benchmark deposit rate could be cut a couple of times between now and then," said Mark Williams, chief Asia economist at London-based research firm Capital Economics.