China cuts bank reserve requirement to spur economy amid trade war

China cuts bank reserve requirement to spur economy amid trade war

The People's Bank of China has made a decision to ease the reserve requirement ratio criteria for small and micro-sized enterprises, in hopes of boosting lending to these companies, The Economic Observer reported.

Analysts at Macquarie Capital said that the rate cut shows government efforts to support the economy have now moved to the "second level" and should signal to investors that more stimulus is in the pipeline.

But with the news, released on Wednesday evening, failing to specify an exact figure, the fact that estimations range from 400 billion yuan (US$58.27 billion) to as much as 700 billion yuan (US$101.97 billion) is seen to reduce the transparency of the policy, making it hard to calculate the exact effectiveness.

"The old playbook of China's economy seems to be back", said Shao Yu, chief economist at Orient Securities in Shanghai.

Analysts at JPMorgan Chase said that the central bank's action suggests that "the Chinese government is tilting toward a growth-oriented stance".

If a bank can prove it has followed instructions from the central bank, including lending more to small businesses, it will be allowed to place smaller reserves at the PBOC so that it will then have more funds to lend.

"That will help the preferentially targeted reserve requirement ratios (RRR) cut cover more financial institutions, encouraging them to serve more small and micro firms", it said.

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The monetary policy transmission mechanisms will be further smoothed out while the proportion of direct financing will be increased to make financing more accessible and affordable for the private sector and small businesses, according to a statement issued after the meeting.

"The People's Bank of China (PBoC) will inject a significant amount of cheap funds to plug the liquidity hole", said Ming Ming, Citic's head of fixed-income research.

The annual Central Economic Work Conference, which concluded on 21 December 2018, set the monetary policy tone as prudent in 2019.

China reported on Monday that factory activity shrank last month for the first time in more than two years, highlighting the challenges facing Beijing as it seeks to end a bruising trade war with Washington.

Friday's cut is still "targeted" easing rather than wide-ranging stimulus, the PBOC said.

Consumption will remain the main driver of China's economy, as weaker credit growth weighs on investment and slowing global demand and higher USA duties on Chinese good take a toll on the country's exports, the report said.

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