The Chinese Communist Party’s central bank has announced it will cut the amount of cash that banks must hold in reserve, according to reports.
The move will unlock $188 billion in long-term liquidity to shore up slowing economic growth.
The People’s Bank of China (PBOC) said on its website on Dec. 6 that it would lower the reserve requirement ratio (RRR) for banks by 0.5 percentage points, effective Dec. 15.
This is the second time this year that the PBOC has reduced the reserve requirement, with the announcement coming after Chinese Premier Li Keqiang last week flagged the move as a way to bolster the economy in the face of headwinds.
Momentum has slowed in China’s economy in recent months, as it contends with a slowing manufacturing sector, debt problems in the property market, and persistent COVID-19 outbreaks.
“The RRR reduction will help alleviate the downward pressure on the economy and smooth the economic growth curve,” Wen Bin, a senior economist at Minsheng Bank, told Reuters.
China’s central bank said the upcoming five-basis-point reduction will not apply to banks with an existing RRR of 5 percent, with the cut allowing most financial institutions to maintain a reduced average ratio of 8.4 percent.
An earlier RRR cut, announced in July, released around $157 billion worth of liquidity into China’s economy.
In its Dec. 6 announcement, the Chinese central bank sought to portray the RRR cut as part of its routine “sound monetary policy,” adding that it would “refrain from indiscriminate liquidity injection,” with a view to keeping the money supply and the flow of credit to the real economy “basically in line with the nominal GDP growth.”
The Chinese Academy of Social Sciences (CASS), a top regime think tank, said Monday that it expects China’s economy to grow by around 5.3 percent in 2022, slower than the 8 percent CASS estimates for this year.
The PBOC’s remarks about not flooding the system with stimulus comes amid concerns that unsustainable levels of debt in China’s beleaguered property sector might spark a financial crisis.
China wants to avoid a bailout, but also is unlikely to let the situation deteriorate to the point where problems would cascade to that level. A number of Chinese real estate companies have run into trouble as the regime has pushed to reduce debt levels.
Chief China Economist at Pantheon Macroeconomics Craig Botham said in a tweet that the PBOC’s decision to cut the reserve ratio is a clear sign that things are getting worse.
“We said in a note to clients on Friday that we’d see a RRR cut this week. Don’t be fooled by this ‘routine’ talk, things are clearly deteriorating,” Botham said.
“As recently as Friday the PBOC maintained everything was fine. Obviously not,” he added.