China signals likely reserve requirement cut to aid growth

Bloomberg

China signalled that more monetary policy stimulus — including a cut to the reserve requirement ratio — is on the table as it looks to boost lending and support the flagging economy.
Tools will be used “in a timely and appropriate manner” to maintain reasonably ample liquidity, the State Council said, broadcaster CCTV reported. The People’s Bank of China usually cuts the amount of cash banks have to keep in reserve within days of such statements by the cabinet.
China’s economy is under pressure from a deepening property crisis and Covid-19 outbreaks. Credit growth in October dropped to the lowest since 2019. Economists surveyed by Bloomberg predict growth of just 3.3% for the full year, far below an official target of around 5.5% that’s been downplayed for months.
“This is in line with our expectations for another RRR cut by year-end. We expect a broad-based RRR cut by 25 or 50bps,” said Liu Peiqian, chief China economist at NatWest group.
The cabinet also said the foundations of recovery should be consolidated and economic growth kept in a “reasonable range,” CCTV reported. It pledged to encourage banks to offer loans to promote the “healthy development” of the property market, as well as boost support for private company bond sales and help the development of online platform companies.
China unveiled support plans earlier this month, including relaxation of some Covid curbs, along with a rescue package for the property sector.
Most analysts had been expecting an RRR cut by early next year. The move, which might replace some maturing policy loans, would unleash liquidity into the interbank system and reduce banks’ funding costs.
The PBOC has become increasingly confident in setting monetary policy that diverges from the rest of the world, having allowed for more flexibility in the yuan’s exchange rate and refined capital controls in recent years. Cooling US inflation, meanwhile, has given the Federal Reserve room to potentially start slowing down steep interest-rate hikes, which is also helping limit the yuan’s weakness against the dollar.
A cut to the RRR, especially a targeted one, could “ensure financial and credit support to the real economy and provide stronger support to several sectors” including households that suffered most from Covid, said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc.

The PBOC last cut the RRR in April, by 25 basis points for most banks, a smaller reduction than economists had expected. The central bank has taken a measured approach to stimulus this year, while fiscal measures are being ramped up to spur growth.