An employee welds the exterior of a vehicle along a production line at a factory in Qingdao, Shandong province December 1, 2014.Reuters
China cut the amount of cash lenders must set aside as reserves in a bid to add liquidity to an economy that last year grew at its slowest pace in a generation.
The reserve ratio will fall 50 basis points on Feb. 5, the People's Bank of China said on its website today. The level will decline to 19.5 per cent, based on previous statements.
The PBOC cut benchmark interest rates in November for the first time since July 2012, joining the European Central Bank and Bank of Japan in deploying fresh stimulus. While that lowered the cost of credit, a RRR cut boosts liquidity by allowing banks to extend more credit.
Price data has given scope for further monetary easing. The producer-price index dropped 3.3 per cent in December from a year earlier, a record 34th-straight monthly decline.
Today's move suggests a shift toward pro-growth policies that may fuel even more debt. An unprecedented lending spree from 2009 to 2013 led to a surge in debt on a scale that's triggered banking crises in other economies, according to the International Monetary Fund.
China has basically halted regular currency intervention, according to PBOC Deputy Governor Hu Xiaolian. That removes pressure to soak up liquidity, giving the PBOC room to lower banks' RRRs.