China Central Bank Ramps up Stimulus to Aid Covid-Hit Economy

(CTN News) – For the second time this year, China’s central bank reduced the amount of cash that lenders must keep in reserve, providing further assistance to an economy battered by an increase of Covid cases and a persistent property slowdown.

According to a statement released Friday, the People’s Bank of China decreased the reserve requirement ratio for most banks by 25 basis points. The adjustment will provide the economy with 500 billion yuan ($70 billion) in liquidity when it goes into effect on December 5.

The decrease is intended to “maintain liquidity relatively adequate” and “increase the assistance for the actual economy,” as well as to enable banks to assist sectors to hit hard by the Covid epidemic.

The State Council, China’s cabinet, asked for greater steps to strengthen the economic recovery earlier this week, hinting at the RRR cut, the first since April. Additionally, the central bank has reduced its benchmark interest rates twice this year; the most recent change was made in August.

The PBOC’s decision recently followed considerable government interventions in the economy, including a rescue plan for the real estate industry and a modification to certain Covid limitations to lessen the economy’s harm.

The prospect for growth is still difficult, however. While Covid cases have risen to a record level and forced major cities like Beijing to limit resident migration, a rebound in the housing market is likely to be gradual.

Nomura Holdings Inc. last week reduced its projection for 2023 economic growth to 4%, according to economists, who predict that China would likely experience a protracted and difficult process of trying to reopen the nation.

“It won’t be easy for the economy with Covid flareups expanding, demanding additional activity limitations, and limiting global growth. Given that scenario, we anticipate the PBOC to continue its policy of gradual easing until 2023.

In the next year, we predict that the PBOC will cut the RRR by 50 bps. It may also reduce the main policy interest rate for its one-year medium-term lending facility by 20 basis points. We predict it will do so in two steps, with the first 10-bp reduction occurring in 1Q23.

The policy relaxation starkly contrasts the interest rate increases this year by the US Federal Reserve and other significant central banks to tackle skyrocketing inflation.

Officials from the Fed recently made it clear they may scale down future aggressive interest rate rises, providing some relief for the yuan following its steep devaluation.

By releasing affordable long-term liquidity for banks, the RRR enables them to provide more loans to individuals and companies.

For financial institutions qualified to get a discount would result in annual financing cost savings of 5.6 billion yuan, according to PBOC.

According to Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc., the action would “moderately cut the financing costs for commercial lenders and boost credit extension, to bring down the borrowing costs by enterprises and consumers.”

According to Ming Ming, chief economist at Citic Securities Co., the greater liquidity for banks would aid in lowering their liability costs, which may encourage them to lower the five-year loan prime rate, a benchmark for mortgage rates.

Although analysts anticipated greater support from the PBOC, the timing came as a surprise considering the central bank’s previous circumspect pronouncements alerting potential inflation dangers.

The PBOC reinstated a clause to deploy “quantitative and structural” functions of monetary policy instruments that it had removed in a report released earlier this month in Friday’s announcement.

PBOC Boosts Stimulus to Support Covid-Hit Economy

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