China cuts bank reserves

CHINA’S central bank has cut by one percentage point the level of funds that commercial banks must hold in reserve – the second such move this year to boost lending.

The move, effective on Monday, comes days after the world’s second largest economy reported its worst quarterly growth figure for six years.

It is the sharpest cut since the start of the financial crisis in 2008.

In a statement posted on its website yesterday, the People’s Bank of China (PBOC, 中國人民銀行) said it will give an additional one-percentage-point reserve ratio requirement cut to banks for agricultural services and a further two-percentage-point cut to the Agricultural Development Bank of China (中國農業發展銀行).

It will also give a 0.5 percent cut to certain banks that give agricultural or small-business loans. The cuts will “further enhance the ability of financial institutions to support restructuring”, the PBOC said.

The reduction in the reserve requirement ratio (RRR) – the amount of cash banks must keep on hand – follows a similar move in early February, which was the first across-the-board cut since May 2012.

The cut came just after central bank governor Zhou Xiaochuan (周小川) said the world’s second-largest economy has scope compared with other nations to ease its monetary policies – though it would not necessarily take advantage of it.

Xie Yaxuan (謝亞軒), China Merchants Securities (招商證券 ) macroeconomics research director, said the cut will release 1.2 trillion yuan (HK$1.5 trillion) in capital to the market – considerably higher than previously.

Xie expects the central bank to maintain loose monetary policy, which could see the interest rate lowered in the second quarter followed by cutting the RRR twice in the second half.

China Southern Asset Management (南方基金) chief strategy analyst Yang Delong (楊德龍) said the central bank cut RRR rather than the interest rate because China’s nearly 20 percent RRR is too high in the global range.

Yang said the measure would push up share prices this week of banks, securities firms and property developers.

China’s gross domestic product growth slowed to 7 percent in the first quarter from 7.3 percent in the final three months of last year, marking the worst result in six years.

(The Standard, Agencies and Jennifer Li, 20 April, 2015)