China to Cut Reserve Requirement Ratio by 100 Basis Points

China cuts bank reserve requirement to spur economy amid trade war

China will cut banks' reserve requirement ratios (RRRs), taxes and fees, Premier Li Keqiang said on Friday, as the world's second-largest economy slows.

Measures will include targeted required-rate-of-return (RRR) cuts, said a statement.

China's central bank said on Friday it was cutting the amount of cash that banks must hold as reserves for the fifth time in the past year - freeing up US$116 billion for new lending as it tries to reduce the risk of a sharper economic slowdown.

Liao Zhiming, an analyst at Tianfeng Securities, wrote that the move could unleash as much as 700 billion yuan of funds, while analysts at China International Capital Corporation expected the change to release only 400 billion yuan of liquidity.

China will also step up "countercyclical adjustments" of macro policies and further cut taxes and fees, Li said.

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.

According to a survey released by the PBOC on Christmas Eve, in the fourth quarter 81.2pc of the participants from the banking sector said the current monetary policy is "appropriate", 4.1 percentage points higher than in the third quarter.




"Policy easing will be stepped up further over coming months", Capital Economics said in a research note.

The cuts will be effective January 15 and January 25, ahead of the long Lunar New Year celebrations when cash conditions often get tight.

Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed China's economy was continuing to lose steam.

The announcement comes as concerns are growing over the effects of the trade conflict with the United States on the country's economy.

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. Implementing the cut in two phases ensures "overall banking liquidity stays reasonable and sufficient while balancing internal and external factors to keep the yuan's exchange rate at a reasonable and equilibrium level", it said.

A further deceleration is seen this year, with some analysts forecasting growth will cool to just over 6 percent.

In addition to monetary policy easing, last week China allocated its local government debt quota "ahead of schedule" to accelerate infrastructure spending.

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