China cuts reserve requirements again this year to prop up economy

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China cuts reserve requirements again this year to prop up economy

BEIJING Reuters -- China said on Friday it would reduce the amount of cash that banks must hold as reserves for the second time this year, releasing about 500 billion yuan $69.8 billion in long-term liquidity to prop up the faltering economy as COVID cases hit record highs.

The People's Bank of China PBOC said it would reduce the reserve requirement ratio for banks by 25 basis points, effective from December 5. The central bank said that it would lower the weighted average ratio for financial institutions to 7.8%.

The cut will help keep liquidity reasonably sufficient and promote a fall in financing costs while helping to stabilise the slowing economy, the central bank said.

The PBOC has been walking a tightrope on policy, aiming to support the slowing economy but also want to avoid big rates cuts that could cause inflation pressures and risk outflows from China, as the U.S. Federal Reserve and other central banks raise interest rates to fight inflation.

Mark Williams, chief Asia economist at Capital Economics, said in a note that the reduction will help banks follow on a directive to defer loan repayments from firms struggling with tighter lockdown restrictions.

Few firms or households are willing to commit to new borrowing in this uncertain environment. The reduction was due to a 25 basis point reduction in April and was widely expected, as state media quoted on Wednesday by the cabinet as saying that China would use timely reserve ratio cuts alongside other monetary policy tools to keep liquidity reasonably adequate.

The PBOC said on Friday that it will step up its monetary policy and focus on supporting the real economy while avoiding flood-like stimulus.

The central bank said that the latest reduction will affect all financial institutions except those with a 5% reserve ratio.

The world's second largest economy suffered a slowdown in October and a recent spike in COVID 19 cases has deepened concerns about growth in the last quarter of 2022, according to concerns about growth in the last quarter of 2022. The economy was already under pressure due to a property downturn and a weakening global demand for Chinese goods.

On Monday, the central bank kept its benchmark lending rates unchanged for a third consecutive month, as a weaker yuan and persistent capital outflows limited Beijing's ability to support the economy.

In recent months the government has rolled out a number of policy measures to support growth, focusing on infrastructure spending and limited support for consumers, while loosening financing curbs to rescue the property sector.

The PBOC issued a notice outlining 16 steps to support the property sector, including loan repayment extensions, in a bid to ease the liquidity crunch that has plagued the sector since mid-2020.

The economic outlook is darkened by the Chinese cities' imposed lock-downs and other measures to curb the rise in coronaviruses, and dampening hopes that China would take a more harsh outlier stance on COVID anytime soon.

The economy grew just 3% in the first three quarters of the year, well below the annual target of around 5.5%. The full-year growth is expected to be just over 3%, according to analysts.