The Chinese government has blinked and moved to try and help the slowing economy after a year of boasting how well the country was recovering from the pandemic.
In a late evening announcement on Friday – hours after the June consumer and producer price inflation data – the country’s central bank announced that it will cut the amount of cash that banks must hold as reserves, releasing around 1 trillion yuan ($US154 billion) in long-term liquidity for banks to lend.
The monthly activity surveys of manufacturing have been falling for the past four months (though still in expansion) while the monthly surveys of services activity have shown signs of an easing in the pace of activity as well.
More details on the economy will emerge this week, June (and quarterly and half year) trade data is out Tuesday. The monthly and half year (and quarterly) figures on industrial production, urban investment retail sales and the important second quarter GDP figures will be issued on Thursday.
The figures are likely to show further signs of a slowing in the pace of activity and perhaps explain why the RRR was cut for a second time in 15 months.
The People’s Bank of China (PBOC) said on its website it would cut the reserve requirement ratio (RRR) for all banks by 50 basis points (bps), effective from next Friday, July 15.
In cutting the RRR – the first since early 2020 – the PBOC said its prudent monetary policy remained unchanged.
Part of the liquidity released will help financial institutions to repay maturing medium-term lending facility (MLF) loans, and will also help ease liquidity pressure caused by tax payments, it said.
But new yuan loans from Chinese banks leapt 40% (in value) in June, a rate of growth that seems at odds with some of the reasons for the cut in the reserves ratio.
The central bank said the weighted average RRR for Chinese financial institutions would fall to 8.9% after the cut and banks that are subject to an RRR of 5% will be exempted from the new cut.
The PBOC last cut the RRR in April last year, when the Chinese economy was still badly affected by the coronavirus crisis. As the economy staged its strong rebound, the PBOC shifted to a moderately tightening bias.
This latest cut has been made with the economy much healthier than it was 15 months ago and yet the PBOC saw a need for a bit of stimulation.
On Wednesday, China’s cabinet hinted that the government would use timely cuts in RRR to help small firms cope with the negative impact from rising commodity prices – an announcement that surprised the markets as was the quick follow up late Friday.
Data released on Friday showed China’s June factory gate prices rose 8.8% – the fastest annual pace in over 12 years due to surging commodity prices. It was down from the 9.0% annual rate in May.
Coupled with supply chain issues, including a global shortage of semiconductors, industrial output slowed for the third straight month in May. There’s an update this Thursday for June.
The computer chip shortage saw car sales fall 12.4% to 2.02 million units in June, the second consecutive monthly fall.
Sales of new energy vehicles (NEVs) including battery-powered electric vehicles, plug-in petrol-electric hybrids, and hydrogen fuel-cell vehicles jumped 139.3% to 256,000 units (an annual rate approaching 3 million).
For the first six months of the year, car sales in China rose 25.6% to 12.89 million vehicles.
Friday’s release from the National Bureau of Statistics, consumer inflation eased in June to an annual rate of 1.1%. That was down from the 1.3% in May and also well under the official target of 3% a year. The driver was the fall in food prices.
Friday also saw data on new bank lending released, showing Chinese banks extended 2.12 trillion yuan ($US327 billion) in new yuan loans in June, up from 1.5 trillion yuan the previous month.
That was a rise of more than 40% which makes the rationale for the reserve release look odd.
