China’s central bank cut the amount of cash that commercial lenders must hold as reserves yesterday for the second time in nearly three months, the latest step to shore up the slowing economy. The People’s Bank of China (PBOC) is on the course of gentle policy easing to cushion the world’s second-largest economy against stiff global headwinds, although it has been treading warily. The PBOC delivered a 50-basis-point (bps) cut in banks’ reserve requirement ratio (RRR), effective from Friday, after repeatedly defying market expectations for such a move.
It would cut the RRR for the biggest banks to 20.5 per cent from 21 per cent, injecting an estimated 400 billion yuan (US$63.5 billion) into the banking system that could be used for lending. “It’s not a big surprise. Although they (Chinese leaders) stress policy stability, an RRR cut is necessary. Trade and monetary data in January pointed to some downward pressure on the economy,” said Hua Zhongwei, an economist at Huachuang Securities in Beijing.
“But policy easing will be gradual given the central bank sounded cautious about inflation in its fourth-quarter monetary policy report.” China’s once turbo-charged economy is likely to slow to 8.2 per cent in the first quarter from 8.9 per cent in the previous quarter, according to the latest Reuters poll. The central bank announced its first cut in RRR in three years on November 30, 2011. That move took the rate down from a record 21.5 per cent. The lower reserve ratio has been followed by a gradual relaxation of some controls on credit at smaller regional institutions in recent months to support the slowing economy.
Investors had expected an RRR cut ahead of the Chinese Lunar New Year, but they were wrong-footed as the central bank opted for open market operations to provide short-term cash for banks. A Reuters poll conducted in January showed the central bank may cut the reserve ratio by a total of 200 bps throughout 2012 to 19 per cent.
The government is reluctant to give the green light to another bout of big bank lending, with inflation risks lingering and, more importantly, policymakers are determined to cool down the property sector to ward off a speculative bubble. Few analysts believe the central bank will cut interest rate cuts this year, with annual inflation staying stubbornly higher than the one-year deposit rate of 3.5 per cent.
