People’s Bank of China to pump extra USD110 billion into economy
October 9, 2018 Category China News Round-up, Weekly
The People’s Bank of China (PBOC) announced a big cut in the amount of cash commercial banks have to put aside at the central bank, a move that will unleash about USD110 billion worth of additional cash for them to lend. The PBOC said it would cut the required reserve ratio (RRR) by one percentage point, effective from October 15, as a way of ensuring “reasonable growth” in credit. The easing, announced on the last day of China’s week-long National Day holiday, came amid an intensifying trade war with the U.S. At the same time, China is facing growing capital outflow pressure as the U.S. Federal Reserve is raising interest rates.
According to the Chinese central bank, Chinese banks can receive CNY1.2 trillion from the one percentage point cut in required reserve ratio, in which CNY450 billion will be used to repay their existing borrowing from the central bank and the other CNY750 billion can be used to lend.
It will be the third RRR cut this year. The new policy will take effect before the release of major third quarter economic indicators on October 19. Some economists have predicted a slower GDP growth rate in the third quarter due to weak investment and tight regulations on the property sector. The intensifying Sino-U.S. trade frictions could add pressure on China’s exports, reducing their contribution to total GDP and leading to more downside economic risks, said Zhang Ming, Researcher at the Chinese Academy of Social Sciences (CASS). The RRR cut and liquidity injection may further narrow the interest rate spread between China and the U.S., especially given that there may still be one more rate hike by the U.S. Federal Reserve this year, Zhang added. The PBOC said in a statement that the RRR cut will not put depreciation pressure on the renminbi.
The PBOC reported that the country’s foreign exchange reserves slipped to USD3.087 trillion by the end of September, down USD22.7 billion from August, a monthly drop of 0.7%.
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