China frees up $70 billion for banks to support slowing economy

China frees up $70 billion for banks to support slowing economy

A man walks past the People’s Bank of China (PBOC) building on July 20, 2022 in Beijing, China.

Jiang Qiming | China Information Service | Getty Images

China announced on Friday it would reduce the amount of cash banks must hold as reserves for the second time this year, freeing up about 500 billion yuan ($69.8 billion) of long-term liquidity to support the faltering economy.

The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio for banks by 25 basis points (bps), starting Dec. 5. This would reduce the weighted average ratio of financial institutions to 7.8%, the central bank said. .

The cut, which follows a 25 basis point cut in April, was widely expected after state media on Wednesday quoted the firm as saying China would use timely reserve ratio cuts, alongside other monetary policy tools, to maintain reasonably sufficient liquidity.

The PBOC has walked a tightrope on policy, seeking to support the slowing economy but keen to avoid sharp rate cuts that could fuel inflationary pressures and risk capital outflows from China, as that the Federal Reserve and other central banks raise interest rates to fight inflation.

The world’s second-largest economy suffered a broad slowdown in October and a recent spike in COVID-19 cases heightened concerns about growth in the final quarter of 2022. The economy was already under pressure from a housing slowdown and weakening global demand for Chinese products. .

On Monday, the central bank kept key rates unchanged for a third consecutive month as a weaker yuan and continued capital outflows limited Beijing’s ability to ease monetary conditions to support the economy.

The government has rolled out a series of policy measures in recent months to support growth, focusing on infrastructure spending and limited consumer support, while easing funding restrictions to rescue the real estate sector.

On Wednesday, the PBOC released a notice outlining 16 measures to support the real estate sector, including loan repayment extensions, in a major effort to ease a liquidity crunch that has plagued the sector since mid-2020.

Chinese cities have imposed shutdowns and other restrictions to curb a further rise in coronavirus cases, clouding the economic outlook and dampening hopes that China will significantly ease its harsh and aberrant stance on COVID any time soon.

The economy grew only 3% in the first three quarters of this year, well below the annual target of around 5.5%. Analysts generally expect full-year growth to be just over 3%.


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