As global markets roil, China has cut the amount of cash its banks must hold as reserves for the first time this year in a clear move to relieve pressure on its banking system and boost its slow re-opening economy.
All banks, except those that have implemented a 5% reserve ratio (the RRR), can cut their ratio by 0.25% from March 27, The Peoples Bank of China announced late Friday night. That will leave the RRR across all banks at an average of 7.6%.
The decision will pump more than $US70 billion into the economy and is the first easing move by a major central bank since the global banking crisis erupted in the US on March 9.
The PBoC cut the RRR twice in 2022, injecting more than 1 trillion yuan ($US150 billion) of long-term liquidity into the markets.
The economic data for the first two months of the year was not solid – some areas OK, such as a small easing in pressures on property, but exports fell, as did imports and inflation slowed to what could be worrying levels where disinflation was very obvious.
Investment was a bit stronger, but retail sales and production were on the weak side.
China’s two cuts to the ratio in 2022 were a half-hearted attempt to stimulate lending and liquidity for small to medium businesses with little success. Economic growth slowed to 3% last year because of thew stringent covid controls of President Xi Jinping and the Chinese Communist Party.
There have now been 19 cuts in the Reserve Ratio since 2018 which hasn’t helped growth which has fallen from 6.75% to 3% in 2022.
The People’s Bank of China said the cut reflected its intention to “make a good combination of macro policies, improve the level of services for the real economy, and keep liquidity reasonably sufficient in the banking system.”
Western analysts say the cut in the ratio probably rules out a cut in the one- and five-year Prime Loan Rates later today. The one-year rate is 3.6% and the five-year rate is 4.3%.
The Economic Daily newspaper claimed that the move by the People’s Bank will ease tension after demand for funds had increased significantly amid the economic recovery. The early release of liquidity will also help prepare for the next stage of demand expansion, it said.
“Currently the risks in the overseas banking industry are increasing and the external environment is becoming more and more complicated,” the newspaper said.
“With the domestic banking industry’s debt repayment costs under pressure and the net interest margin continuing to narrow to historical lows, the central bank made a timely move to lower the reserve requirement ratio to release long-term liquidity to the financial system,” it said.
“Currently the risks in the overseas banking industry are increasing and the external environment is becoming more and more complicated,” the newspaper said.
“With the domestic banking industry’s debt repayment costs under pressure and the net interest margin continuing to narrow to historical lows, the central bank made a timely move to lower the reserve requirement ratio to release long-term liquidity to the financial system,” it said.
Saturday also saw a senior PBOC official tell a conference that the collapse of Silicon Valley Bank and other banking problems flowed from the rapid monetary policy changes seen offshore.
Reuters reported that Xuan Changneng, a deputy governor at the People’s Bank of China told the Global Asset Management Forum in Beijing that some financial institutions had grown accustomed to running their balance sheets in an environment of low interest rate volatility and as such lacked sensitivity to short-term and large fluctuations in rates.
Silicon Valley Bank’s balance sheet characteristics made it more sensitive to interest rates changes and ultimately led to risk, he was quoted as saying.
“Based on the current situation, there is still uncertainty about whether inflation in the major developed economies will fall significantly in the short term, and continuing to maintain relatively high interest rates may also have an adverse impact on the steady operations of the banking and financial system,” he said.
Chinese official media reported each story separately and didn’t try to link them.
