Cuts meant to restore confidence in economy
China's central bank announced Monday another round of cuts to the amount of money banks are required to keep to boost market liquidity, as the country strives to reverse the economic slowdown and a bearish stock market.
This is the fifth reserve requirement ratio (RRR) cut the People's Bank of China (PBC) has made since February 2015. However, the cut, which aims to restore confidence in the Chinese economy, may have a "limited impact," analysts said, saying more cuts are expected this year.
The PBC said it will lower the RRR by 0.5 percentage points in March to maintain "reasonable and adequate" liquidity in the financial system and provide a proper environment for the country's "supply-side reform."
The move will release about 700 billion yuan into the market, according to analysts.
"After delays, the RRR cut we've been expecting has finally come, which means [monetary easing policies] are back on track," Liu Dongliang, an analyst at China Merchants Bank wrote in a note sent to the Global Times on Monday.
Facing a slowing economy, which grew by 6.9 percent last year, China has been pursuing a "prudent" monetary policy, including six interest rates cuts and five RRR reductions since November 2014. The previous RRR cut happened in October last year.
The persistent downward pressure in the world's second-largest economy and the lack of effect of previous liquidity-boosting measures prompted the central bank to make the RRR cuts on Monday, Liu noted.
Recent data suggests that the Chinese economy continues to slow down. The official manufacturing purchasing manager's index (PMI), a closely watched gauge of factory activity, skidded to a three-year low at 49.4 in January, according to the National Bureau of Statistics (NBS).
Despite rising inflation in January, the producer price index remained in negative territory for the 47th consecutive month, according to the NBS, indicating the economy continues to face deflationary pressure.
Given such pressure, if the central bank does not take any easing measures, economic conditions could worsen, Liu noted.
"The RRR cuts will no doubt support the financial market as well as the real economy," said Xu Hongcai, director of the Economic Research Department at the China Center for International Economic Exchanges.
And since previous money infusions by the PBC through short-term reverse repurchase agreements will soon expire, it is necessary to maintain a liquidity level through RRR cuts, Xu said.
The PBC has been holding off broad-based easing measures since last October, and has instead been infusing billions of dollars into the market by issuing short-term reverse repurchase agreements to boost liquidity.
'Limited impact'
However, such monetary easing measures will have a "limited impact" on the fundamentals of the turbulent stock markets and the slowing economy, said Xu Guangfu, an analyst at Shanghai Yinji Asset Management Company.
"It's more of a move to improve investor confidence rather than to stabilize the stock markets or revive the economy because that's impossible with just monetary easing," Xu told the Global Times on Monday.
He said turmoil in the stock markets has been caused by a lack of confidence in the real economy, the loss of steam in major growth engines such as investment and manufacturing and the failure to find a substitute.
Chinese mainland stock markets continue to experience turbulence. On Monday, share prices tumbled, with the benchmark Shanghai Composite Index falling 2.86 percent and the smaller Shenzhen Composite Index dropping 4.98 percent.
Xu said Monday's PBC move, along with the government measures to reduce oversupply by providing monetary incentives, will boost the housing market.
The housing market showed signs of improvement, especially in first-tier cities such as Beijing and Shanghai, according to the NBS on February 18.
