China to Cut RRR amid Slower Economic Growth

16 2018 shows a traffic jam at a crossroad in the city centre of Beijing at night

Image People's Bank of China acts to support economic growth

At the same time, the central bank's move is still seen a good news for lenders and the broad economy as liquidity is tightening before the Lunar New Year holiday. Zhang Yu, a research director at Huachuang Securities, thinks there could be an RRR cut in mid-January.

The PBOC will cut the RRR by 0.5 percentage points on January 15 and January 25, respectively, a PBOC statement said.

The Chinese government is stepping up support efforts.

"At present, the economy is facing very big downward pressure amid internal and external troubles".

"The economy is weak and stimulus needs to arrive quickly", economists at ING said in a note earlier this week.

"With credit growth still slowing and, typically, a six-month lag before any turnaround in credit affects the economy, worries about the outlook for China will persist for several months yet".

The latest reduction announced is the first all-inclusive RRR cut since March 2016.

Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed China's economy was continuing to lose steam.

Bank lending, money supply and - in a broader context - total social financing will maintain a proper growth pace to cope with GDP growth, they suggested.

Analysts say Beijing will have to keep up a steady stream of stimulus to engineer a sustainable economic turnaround.

In addition, the PBoC pledged to keep the yuan exchange rate basically stable at a reasonable and equilibrium level with use of a variety of monetary policy tools, according to its Q4 monetary policy statement released on 27 December.

The twisted and conditional liquidity support is part of the central bank's controversial plan to implement "targeted easing" which is aimed at ensuring funds will end up in hands of the right borrowers such as small factory owners.

Economists believe the government could take more fiscal steps by cutting taxes and boosting spending on infrastructure, amid expectations that the budget deficit ratio could be lifted to 3 percent in 2019 from 2.6 percent a year ago.

Together, the new measures should inject about 800 billion yuan ($116 billion) into the world's second largest economy as growth slows and a trade war with the United States takes its toll.

Chinese monetary policy will be targeted to better serve real economic growth and buffer economic downside risks next year, in order to avoid aggressive credit expansion, according to policy advisers.

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