Move expected to release up to $242 billion in liquidity
China's central bank will cut the amount of funds all banks must hold in reserve by 1 percentage point starting Monday, it said Sunday in a statement on its website.
It will be the People's Bank of China's (PBC) second cut in the reserve requirement ratio (RRR) this year after it reduced the RRR by half a percentage point on February 5.
Experts said the move is going to release up to 1.5 trillion yuan ($242 billion) in liquidity.
The RRR is the minimum level of deposits and notes that each commercial bank must hold in reserves rather than lend out.
For rural credit cooperatives and banks in towns and villages, the rate of the savings deposit reserve fund will be lowered by a further one percentage point. Rural cooperative banks will enjoy the same rate as rural credit cooperatives, according to the central bank.
The Agricultural Development Bank of China will enjoy an additional two percentage point reduction.
Lian Ping, chief economist at the Bank of Communications, told the Global Times Sunday that this RRR cut is aimed at releasing liquidity to ease the slowing growth in deposits and declining funds outstanding for foreign exchange.
Data released by the PBC on April 14 showed China's deposits growth in Q1 declined to 1.64 trillion yuan compared with the same period last year.
"A slowed growth in the deposit growth and a negative growth in funds outstanding for foreign exchange means that an adjustment in the policy is necessary," said Lian.
Xu Hongcai, an expert at the China Center for International Economic Exchanges, told the Global Times Sunday that the RRR cut is a quick response to the sliding economic performance in the first quarter.
"The economic data in the first quarter is weak, including performance in investment, export, consumption and the housing market. The overcapacity issue of the real economy remained fundamentally unsolved," Xu said.
Zhu Lixu, a Shanghai-based analyst with Xiangcai Securities, told the Global Times on Sunday that the policy hopes to ease China's downward economic pressure. China's GDP in the first quarter stood at 7 percent, and the real economic situation on the ground could be even worse. "Companies, governments, and capital markets will benefit from this action from the cut," Zhu said.
Liu Dongliang, an analyst at China Merchants Bank, said in a statement e-mailed to the Global Times that hastening easing measures would ensure timely policy support for the economy.
"The unemployment pressure remains manageable but there is a risk of debt default. This means it is necessary to keep the decline in the growth rate from falling too fast. This round of easing is more vigorous, which can be seen as a follow-up of previous milder easing," said Liu.
Industrial output and retail sales slid in March, while fixed asset investment also retreated in the first quarter of 2015.
As to the impact of the RRR cut on China's future economic performance, Xu said that this round of monetary policies combines with a number of other measures, which include the new real estate policy introduced on March 30 and fiscal tax cuts, and they would stimulate economic growth.
"We expect the economy to start showing signs of improvement during the second quarter, and further improvement will be reflected in the third quarter," said Xu.
Peng Wensheng, chief economist at CITIC Securities, told the Global Times Sunday that the easing is an effective measure to offset the liquidity shortage. "It reduces the financing cost for enterprises by giving them more options in financing via the debt and secondary markets," said Peng.
Lian told the Global Times that the RRR cut would largely help China's real economy as it encourages bank lending.
In a move to make it cheaper to borrow money, the central bank lowered the one-year benchmark lending rate by 25 basis points to 5.35 percent, while the one-year benchmark interest rate on deposits would fall by the same amount to 2.5 percent starting March 1.
But the long-term sustainable development remains in reform and restructuring while policy stimuli serve the short-term goal, Xu said.
"China's industrial competitiveness is still not satisfactory and we should continue to push the development in manufacturing high-end products with more added value," Xu noted. "To ease shrinking foreign trade, new growth points should be nurtured and increase the development of the Public Private Partnership model."
