(Bloomberg) --
The People’s Bank of China cut the amount of cash that banks have to set aside as reserves, injecting funds into the world’s second-largest economy at a time when global policy makers are racing to head off the negative impact of the coronavirus outbreak.
China’s central bank offered discounts to commercial lenders’ reserve ratios of a half or 1 percentage point from their original level, the PBOC said on its website on Friday. Joint-stock banks will get an additional reduction of 1 percentage point and together the cuts will release 550 billion yuan ($79 billion) of liquidity, the statement said.
China’s economy has been hit hard by the spread of the virus and the associated quarantine measures since January, which shut down much economic and daily activity. However, even with these reductions, the PBOC has so far been less aggressive than other global central banks, which have acted in recent days to steady markets and their economies.
“It is quite unlikely to see PBOC cutting rates as aggressively as some other central banks, especially the Fed, as an aggressive rate cut may not be as effective as fiscal and administrative measures to support the resumption of normal operations at this stage,” said Becky Liu, China macro strategist at Standard Chartered Plc in Hong Kong. “Fiscal measures including tax cuts and exemptions” as well as low-cost loans are likely to be more useful, she said.
That caution is driven by fears of another debt blowout after total borrowing ballooned in the decade after the global financial crisis, in large part due to the 4 trillion yuan stimulus and wave of bank lending unleashed at the time.
A dramatic escalation of stimulus would mean that the government and central bank would need to soften their approach to reining in debt, a focus that has forced the government to lean on measures like tax cuts and support for small and medium-sized business instead of large-scale fiscal spending.
To qualify for the reduction announced Friday, banks have to pass an annual review that assesses their lending to small firms in 2019, and the changes will reduce banks’ interest costs by 8.5 billion yuan a year, the PBOC said. The lower costs could lead to a 5 basis-point drop in the loan prime rate on Mar. 20, according to China Minsheng Banking Corp. researcher Wen Bin. The LPR is the interest rate on which borrowing costs for loans are based.
The RRR reductions will take effect on Monday, when the government will announce data which is expected to show that the economy shrank in the first two months of the year. Data on China’s industrial output, investment and retail sales are forecast to show an across-the-board contraction for the first time on record, evidence of the extent to which the coronavirus has ravaged the economy.
“The targeted RRR cut will be effective next Monday to offset the data shock,” said Xing Zhaopeng, a market economist at Australia and New Zealand Banking Group in Shanghai. He expects the PBOC to restart open market operations soon to offer sufficient liquidity to help banks get past the end of the quarter. The last operation was on Feb. 17, according to Bloomberg data.
A reserve-ratio cut, while not immediately lowering the cost of borrowing, is a rapid way of freeing up cheap funds to lend and has been a favored tool in the central bank’s efforts to control the economic slowdown in recent years. The step is a continuation of the targeted approach to stimulus, which has so far featured credit easing and tax cuts.
The central bank is “making its prudent monetary policy more flexible and appropriate,” the PBOC said in the statement. “The restoration and development of the real economy is being put in a more prominent position, while excessive liquidity will be avoided.”
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