China cut the amount of cash banks must keep in reserve at the central bank in an effort to support lending and strengthen the economy’s recovery from pandemic restrictions and a property market slump.

The People’s Bank of China reduced the reserve requirement ratio (RRR) for almost all banks by 0.25 percentage points, effective from March 27, it said in a statement on Friday. The PBOC last cut the RRR in December, by the same magnitude.

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Economists said the cut was aimed at ensuring liquidity in the banking system to sustain the rapid pace of lending seen in January and February. The move sends a “clear signal” that the authorities intend to guide financial institutions to better stabilize growth, expand domestic demand and consolidate the recovery, said the Economic Daily, a newspaper affiliated with the State Council, China’s cabinet, in a Saturday commentary.

The magnitude of the reduction was based on the consideration that the RRR is currently at “a relatively low” level and that the monetary policy should remain prudent, according to the article. The PBOC has delivered 14 RRR cuts since 2018, lowering the weighted average ratio for banks to under 8% from nearly 15% and releasing more than 11 trillion yuan ($2.13 trillion) in long-term liquidity, it added.

China’s consumer spending and investment rebounded in the first two months of the year after pandemic restrictions were dropped in December, according to recent official data. But the recovery remains uncertain, with unemployment still elevated, property investment continuing to contract and falling exports dragging on industrial output.

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“It seems that the central bank is not going to slow the pace of credit growth as people feared,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd.

The timing of the cut could be due to concerns that credit growth could slump in April, following the completion of financing for a number of government-led investment projects early this year, Xing added.

The yuan pared an advance of as much as 0.6%, trading 0.1% stronger at 6.89 in the onshore market after the PBOC’s move.

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<blockquote><br><div><h3><strong>What Bloomberg Economics Says...</strong></h3></div><br><br><div>The PBOC’s move “highlights an easing bias — we expect an interest-rate cut to follow and see the PBOC trimming the required reserve ratio further this year.”</div><br><br><div>It’s estimated the RRR cut “will release 500 billion yuan in long-term cash to the banking sector.”</div><br><br><div>For the full report, click here</div><br><br><div>David Qu, China economist</div><br></blockquote>

The PBOC said the cut in the reserve ratio was aimed at maintaining “reasonable and sufficient liquidity” and ensuring that money supply increases in line with nominal economic growth. The central bank added it won’t engage in “flood irrigation,” a term it uses to refer to large stimuli.

The average reserve rate of financial institutions will be 7.6% following the cut, the PBOC said. The cut will not apply to banks whose reserve rate is 5%, it added.

The Economic Daily said the government will follow the “aggregate policy” move with structural measures and make good use of tools such as RRR reductions and relending to beef up effective support for the economy.

The cut “is about topping up the lending capacity of banks, after strong long-term corporate loans and local government bond issuance to fund infrastructure and manufacturing investment in January-February,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.

Beijing has set a moderate gross domestic product growth target of around 5% for this year, and signalled it will rely on a recovery in consumer spending to reach that goal while avoiding large-scale monetary and fiscal stimulus.

Huang Yuhang, a fund manager at Lanqern Capital Management Co., said the PBOC’s move was likely less to do with fears about banking stress, “but rather the recovery seems to need a bit of help, judging by the economic figures this week.”  Huang added that “the key impediment to the recovery is demand still being weak, as confidence for incomes is still fragile.”

<span class='see_also_inread'><b>To stay ahead of Singapore and the region’s corporate and economic trends, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/latest?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Latest Section</a></b></span>

PBOC Governor Yi Gang, who was recently reappointed to his post, said at a press conference this month that current interest rates were appropriate. He added that cuts to the reserve ratio could be an “effective tool” to support the real economy.

While the current economic recovery means that there is less need for an interest rate cut, the PBOC could cut the RRR by a further 0.25 - 0.75 percentage points this year, said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.

“The probability of a further cut is relatively high in the middle of the year when liquidity tends to tighten” and in the fourth quarter, he said.

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