China cuts bank reserve requirements as trade war threatens growth

BEIJING (Reuters) – China's central bank on Sunday announced a sharp reduction in liquidity that banks need to keep as reserves, reinforcing measures to cut funding costs and boosting growth in the face of economic worries over intensification. of trade conflict with the United States States.

The reduction in reserve requirements, the fourth by the People 's Bank of China (PBOC) this year, comes as Beijing is committed to accelerating the investment plans of billions of dollars in projects. infrastructure, while the economy is showing signs of slowing, investment growth slowing at an accelerated pace. record low.

Reserve reserve ratios (RRRs) – currently 15.5 percent for large commercial lenders and 13.5 percent for small banks – would be reduced by 100 basis points as of Oct. 15, the PBOC announced. which corresponds to a movement of similar size in April.

Economists have predicted further cuts.

Beijing has stepped up its liquidity support in the financial system this year, as policymakers focused on easing fears of capital outflows and appeasing struggling markets as growing concern grew over the past year. a violent trade war with the United States could be a blow to the economy.

The Chinese currency, the yuan, has faced strong pressure on sales this year, losing more than 8% between March and August at the height of market concerns, although it has since reduced its losses as authorities reinforced their support.

Sunday's decision will inject 750 billion yuan ($ 109.2 billion) of money into the banking system by unlocking 1,200 billion yuan of liquidity, including 450 billion yuan to offset the influx of loans through loans. a medium-term loan facility.

The reduction of the RRR, announced on the last day of the national holiday in China, indicates that the central bank is worried about the impact of "external shocks" in the markets, like a speech delivered last week by US Vice President Mike Pence, said Zhang Yi, chief economist at Zhonghai Shengrong Capital Management.

Pence stepped up Washington's crackdown on Beijing on Thursday accusing China of "malicious" efforts to undermine US President Donald Trump ahead of next month's congressional elections and reckless military action in the South China Sea.

Pence's speech marked a sharper US approach to China, going beyond the fierce trade war between the two largest economies in the world, which has heightened concerns about the prospects of the world. Chinese economy.

"VERY IN TIME"

The weakening of exports was already weighing on growth in the first half, after boosting the economy last year, highlighting the need to sustain domestic demand for the long term if significant new tariffs were imposed on the United States.

The "very timely" reduction of the RRR is important enough to boost confidence in the economy, said Xu Hongcai, deputy chief economist of China's Center for International Economic Exchanges, a Beijing think tank.

"The impact of the trade war on the economy is obvious. Further reductions are possible and I expect another 1 percentage point reduction by the end of the year, "added Xu.

China will also adopt a more proactive tax policy, including tax cuts on a larger scale, to preserve economic growth, Xinhua News Agency quoted Finance Minister Liu as saying on Sunday. Kun.

Total tax cuts for the year are expected to exceed 1.3 trillion yuan, according to Liu.

"Some regions and businesses have been affected (by trade frictions), but China is able to minimize the impact," Liu said. The government has taken steps to help businesses affected by the trade war, he added.

The central bank announced on Sunday that it would continue to take the necessary steps to stabilize market expectations, while maintaining a prudent and neutral monetary policy.

The PBOC "would maintain sufficient liquidity to stimulate the reasonable growth of monetary credit and social financing," he said.

The reduction of the RRR would not create depreciating pressure on the yuan, said the PBOC, adding that it would maintain the stability of the currency markets.

SOFTENING BASED ON DEBT DEBT

With the slowdown in the Chinese economy and the full impact of US tariffs that have not yet been felt, policymakers are increasingly moving towards reducing the risks to growth, as the yuan and the stock markets are under pressure.

China's economic growth rate slowed slightly to 6.7% in the second quarter of last year, well above the target of 6.5%. by the government for the whole of the year. However, some key activity indicators have weakened more strongly.

Investment in fixed assets grew at the slowest pace ever, while non-performing loans jumped in the second quarter and defaults increased. The national unemployment rate reached 5.1% in July.

Small businesses, in particular, are struggling to obtain loans and are facing higher borrowing and operating costs, fueled in part by a lengthy official crackdown on riskier loans such as the shadow banking system.

The weighted average rate of loans to non-financial corporations, which reflects corporate financing costs, increased by 1 basis point in the second quarter to 5.97%, following a rise of 22 basis points in the first quarter and 47 basis points in 2017.

The Chinese banking regulator has asked banks to significantly reduce the financing costs of small businesses and increase their tolerance to non-performing loan ratios for small and micro businesses.

China's political bureau and state council have also replaced the term "deleveraging" with "structural deleveraging," a change that suggests less severe debt reduction measures.

"Liquidity outcrops in the banking system. The key question is how to channel the funds to the real economy, "said Zhang Yiping, chief economist at Merchants Securities in Shenzhen.

"The external environment is becoming more and more difficult and we can not rule out further RRR cuts," said Zhang.