Central bank lowers deposit requirement

Move aimed at stimulating economy

China will lower banks' reserve requirement ratio (RRR) by 50 basis points (bps) starting Thursday, the central bank said Wednesday, the first of its kind in more than two years in a move economists said would stimulate the economy and offset capital outflows.

It is the first time the People's Bank of China (PBOC) has made an overall RRR cut since May 2012, after China's economy grew at its slowest pace in 24 years in 2014. Following the cut, most large commercial banks will hold 19.5 percent of their deposits as reserves, with more funds for loans.

City commercial banks and non-county rural commercial banks that have met the lending target to small and micro enterprises will receive a further 50bps cut, the PBC said in a statement on its website.

The Agricultural Development Bank of China, the sole policy bank for agriculture, will get a further RRR cut of 4 percent to support the agricultural sector and large water projects, the PBC added.

The move is in line with market expectations that the central bank would ease its monetary policy to stimulate the economy. Its growth rate is widely expected to further slow down to around 7 percent in 2015.

"The announcement isn't a surprise. It is consistent with the benchmark interest rate cut in November," Mark Williams, the chief Asia economist with Capital Economics in London, wrote in an e-mail to the Global Times Wednesday.

Liu Ligang, the chief China economist of the ANZ Banking Group, said that the reserve cut was prompted by a number of factors, including the 28-month-low official January Purchasing Managers Index (PMI), an increase in the capital outflow in the fourth quarter of 2014, and the easing of the monetary policy of major economies such as the European Union, Australia and Canada.

During 2014, the country's industrial profits expanded by 3.3 percent year-on-year, the weakest performance in about two years.

In the same year, profits of major private industrial firms grew by 4.9 percent, much less than the 14.8 percent in 2013, according to the National Bureau of Statistics.

Economists expect the central bank's latest move to add up to 600 billion yuan ($96 billion) to the banking system, to offset the impact of capital outflows and relieve a tighter liquidity ahead of the Spring Festival holidays, which runs from February 18 to 24 this year.

"The RRR cuts, the interest rate cut in November and the recent approval of infrastructure projects are proof of the central authorities' efforts to stabilize the economy and relieve government debt risks," Li Qilin, an analyst with Minsheng Securities, said Wednesday.

The move will boost the real estate and stock markets, industry analysts said.

"The RRR cuts will have an immediate effect on the property market. Banks will have more funds to lend to homebuyers, and property developers will be less willing to cut home prices," Yan Yuejin, a researcher with the Shanghai-based E-House China R&D Institute, told the Global Times Wednesday.

"It will also increase the possibility of stabilizing home prices," he added.

Yang Delong, the chief strategist at China Southern Asset Management Company, said Wednesday that the mainland stock market will also benefit from the move, led by large-cap and blue-chip shares.

However, some are more cautious about the potential effects of the cuts, and expect more monetary easing the rest of the year. "The direct impact of the cuts will be small, because the RRR is only one of the constraints that banks operate under," Williams said. He noted that for smaller banks in particular, the loan-to-deposit ratio is the primary basis for increased lending.

Liu said he expects another two 50bps RRR cuts this year, and the deposit rate will be also cut by up to 50bps. "Further monetary policy easing is still required to prevent the economy from falling below 7 percent in the first quarter of 2015 and fend off rapid disinflationary pressures," he said Wednesday.