Experts see continued policy support as China increases reserve requirements

Workers assemble wind turbine wheels at a factory in the Lianyungang Economic and Technological Development Zone, East China's Jiangsu province, February 28, 2023. After the country's central bank strengthened policy support with a cut in financial institutions' required reserves, continuing policy measures to protect China's economic recovery from external uncertainties can be expected, according to experts on Monday.

They said the decision to reduce the reserve requirement ratio, which determines the amount of cash banks must hold as reserves, shows that Chinese policymakers are keen to maintain macroeconomic policy support amid rising global financial volatility and economic downside risks.

On March 27th, the People's Bank of China said it would reduce the reserve requirement ratio for financial institutions by 0.25 percentage point to keep liquidity in the banking system.

The move is estimated to release around 500 billion yuan $72.67 billion into the market, helping stabilize borrowing costs and strengthen domestic banks' ability to counter rising global financial risks, experts said.

The cut sends a signal that policymakers are taking a proactive approach to supporting the economy, as the relaxation comes even as economic and financial data is picking up, said Zhong Linnan, senior macroeconomic analyst at GF Securities.

The central bank has stressed that the cut is part of an optimal combination of macro policies to serve the real economy, which may include more support in terms of monetary, fiscal and industrial policies, according to Zhong.

Experts said it is possible that loan prime rates — China's market-based benchmark lending rates — may slightly decline this year and help domestic demand. The one-year loan prime rate was unchanged on Monday, at 3.65 percent, according to the PBOC.

Yan Se, an associate professor of applied economics at Peking University's Guanghua School of Management, said that the scope for and possibility of loan prime rates declining will remain during the rest of the year, as the cut in reserve requirement ratio will help to tamp down funding costs.

He said that China's monetary policy is expected to remain relatively accommodative this year to expand domestic demand and consumption, which will be key to offsetting the downside risks facing exports because the stress on the international banking system can hinder global credit expansion and affect economic growth.

As the US Federal Reserve and other central banks have raised interest rates at the fastest pace in years to curb inflation, a growing number of banks are caught in a strain of liquidity.

After the failure of the US - Silicon Valley Bank and Signature Bank, Swiss lender Credit Suisse reached a rescue deal with UBS over the weekend, whereby the latter will be acquired for 3 billion Swiss francs $3.23 billion, according to experts who warned that the turmoil could continue as the Fed's rate hike cycle continues to come to an end, with its latest interest rate decision due to be unveiled on Wednesday.

Despite rising external fragility, China is still capable of achieving its annual GDP growth target of around 5 percent, according to Yan.

He said it is likely that China's GDP will expand by more than 5.5 percent this year, due to the economy's internal momentum to recover from the impact of COVID 19, continuous policy support and last year's low comparison base.