China has cut the amount of cash that commercial banks must hold on reserve at the central bank, a modest move to ease monetary policy in the wake of signs that the economy is slowing.
The People’s Bank of China will cut the required reserve ratio by 1 percentage point, bringing the ratio for the country’s six largest lenders down to 16 per cent of total deposits, the central bank announced late on Tuesday.
“It’s a very subtle easing signal. Recent data has been pretty weak, including the credit data, but they don’t want to loosen too aggressively at this moment because deleveraging is still the priority,” said Larry Hu, China economist at Macquarie Securities in Hong Kong.
Early on Tuesday, China announced that the economy grew at 6.8 per cent in the first quarter, comfortably ahead of the government’s target of 6.5 per cent. But beneath the strong headline figure are signs that growth momentum is waning, including weaker factory output and slowing property sales.
Credit and money-supply data released on Monday showed new loans and broad money both missing expectations last month, prompting Goldman Sachs to warn of “significant downward pressures” if March’s weak pace of growth continues.
But in a statement accompanying Tuesday’s announcement, the PBoC emphasised that its “prudent” monetary policy stance remained unchanged, a clear attempt to discourage the interpretation of the latest move as opening the floodgates for stimulus.
The central bank said it would sterilise the liquidity injection from lower reserve requirements through a corresponding reduction in loans to commercial banks through its Medium-term Lending Facility (MLF).
“The market has a tendency to think that whenever there’s a reserve-requirement cut, it’s easing. But actually, the banking system’s access to liquidity hasn’t changed. They’ve just swapped one facility for another one,” said Chen Long, economist at research group Gavekal-Dragonomics in Beijing.
Although down from a peak of 21 per cent in 2011, China’s reserve ratio for big banks remains the highest of any major economy. But the tool is a legacy from a different era, when the main task of monetary policy was to prevent massive foreign-exchange inflows from swelling the domestic money supply and sparking inflation.
Today, the situation is different. Capital inflows have diminished — at times turning to outflows — and inflows are no longer a significant source of money growth. In response to this new reality, the central bank created the MLF and other new tools for expanding the money supply.
But the legacy of high reserve requirements has created distortions that the PBoC’s latest action aims to correct.
Banks earn a meagre interest rate of 1.62 per cent from the central bank on their required reserves but pay 3.2 per cent on MLF loans from the central bank. This gap inflicts guaranteed losses on lenders.
By unlocking cash that banks were previously required to hold at the central bank, Tuesday’s move will enable lenders to reduce their borrowings from MLF.
“It doesn’t really make sense to ask the banks to hand over money to the PBoC first, then turn around and ask them to borrow from PBoC but to pay a much higher rate. Today is a partial correction for that,” Mr Hu said.
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