China suggests possibility of lower reserve rate to halt slowdown

BEIJING – The governor of China's central bank said on Sunday that it was possible to reduce banks' reserve requirements, as it appears to reduce the risk of a more pronounced slowdown in the world's second-largest economy.

China has reduced the liquidity ratio that banks must hold as reserves five times in the past year, despite the weakest economic growth in 28 years due to slowing consumption and trade conflict with China. Washington. The governor of the People's Bank of China, Yi Gang, however, said the reduction opportunities are narrower than before.

"At present, I think that it is still possible to reduce the reserve ratio, but the margin has become much smaller than in previous years," Yi told reporters in Beijing on the sidelines of the National People's Congress.

He said it was necessary to keep the reserve ratio at a certain level while the country was still in a development phase, adding that China's current level was at an international average level – similar to the United States and developed countries in countries such as Europe. much lower than in Japan.

China on Tuesday announced tax cuts and an increase in government bond issues to support an economy that it expects to grow between 6% and 6.5% this year. Yi also highlighted PBOC's efforts to increase lending to small businesses. However, despite a series of support measures, data released on Friday showed that February's exports fell 20.7% from the previous year – the biggest drop since February 2016.

The PBOC has reduced its reserve requirement ratio by a total of 350 basis points in five cuts over the past year. The average ratio for all financial institutions is around 12%, said Yi.

"Yi may want to point out that, although there is a margin for a cut, it's not that big," said Yusuke Miura, senior Chinese economist at the Mizuho Research Institute in Tokyo. "He seems to want to minimize expectations in terms of easing."

Yi also revealed that the yuan-dollar exchange rate had been discussed during trade talks with Washington. President Donald Trump has repeatedly attacked China for what he perceives as manipulating the Chinese currency to boost exports, and the United States is seeking to pledge not to devalue the yuan.

The PBOC Governor said the currency talks would include respect for the autonomy of the authorities on both sides when setting monetary policies, the adoption of the standards set by the International Monetary Fund for the disclosure of money. information and non-devaluation of currencies to win competition.

"Both sides reached consensus on many crucial issues," Yi said. "I insist that we will never use foreign currency for competition purposes or to boost exports."

He added that the market should be the driving force in the formation of China's foreign exchange mechanism.

"The central bank is already largely out of the daily intervention of the foreign exchange market," he said, adding that having a certain degree of flexibility and market fluctuation was good for the economy.

Chinese officials are optimistic that trade talks with the United States are still ongoing despite the doubts expressed in recent days by senior US officials.

Miura said that "Yi has shown consideration to the United States, but he also pointed out that the independence of the two countries' policy should be respected in order to avoid criticism of the United States. inside China ".

In addition to trade negotiations, China faces national concerns, especially for the small businesses that make up the bulk of its economy.

Chinese authorities use the term "56789" to refer to the importance of private enterprise. These businesses, many of which are small, would account for 50% of tax revenues, 60% of gross domestic product, 70% of innovation, 80% of urban labor force and 90% of total numbers. Companies in the country.

"Support from financial institutions for small businesses and private companies has increased significantly recently," said Yi Dimanche.

PBOC deputy governor Pan Gongsheng said the central bank was aiming to increase by 30 percent the loans made by big commercial banks to small businesses from 2018 – a goal that Prime Minister Li Keqiang mentioned in his government work report on Tuesday.

The central bank also seems to manage investor expectations in the traditionally risk-free bond market, with the deputy governor saying it is good to have flaws. He noted that there had been an increase in bond defaults last year, but that the level was still lower than that of most other countries.

"[Some defaults] will help break the rigid payment cycle and correct market distortions, "said Pan, adding that pricing and resource allocation would also become more efficient.

Even if there is a risk of debt related to bad debts, Chinese leaders are giving more and more importance to measures to help the private sector to avoid a further slowdown.

Yi has put in place measures that make it easier for small businesses to obtain loans, and the PBOC gives high ratings to financial institutions that provide such support.

"The PBOC has focused on funding, especially for small businesses, in the last six months," said Miura, of Mizuho. "This leads to social stability."