Central Bank to cut bank reserve requirement

China’s premier Li Keqiang

China has cut the amount of cash the country’s lenders must set aside as reserves in the second such move in three months, stepping up stimulus after Premier Li Keqiang pledged to take action if needed to shore up growth.
The reserve-requirement ratio will be reduced by 1 percentage point effective today, the People’s Bank of China said on its website yesterday. The level will decline to 18.5 percent, based on previous statements.
The move allows banks to hold onto less of their money and lend more of it out. The Communist Party-run People’s Daily said the cut will release 1.2 trillion yuan (USD194 billion) into the world’s second-biggest economy.
The Central Bank also said it will cut an extra 1 percentage point for commercial banks providing agricultural financing and an extra 2 percentage points for the Agricultural Development Bank of China. It will also cut the requirement by an additional half a percentage point to eligible banks that lend a certain share of loans to agricultural borrowers and small businesses.
Gross domestic product expanded 7 percent in the three months through March from a year earlier, the least since 2009, while industrial production in March rose at the slowest rate since November 2008. An economy-wide inflation indicator turned negative last quarter for the first time since 2009, suggesting room for easing.
“The move is positive, showing policy makers are trying to offset the impact of potential capital outflow and stabilize the macro environment,” said Helen Qiao, Hong Kong-based chief greater China economist at Morgan Stanley. “The 100 basis point cut shows the intensification of policy easing, which is warranted given the sharp slowdown.”
The RRR cut is the first major monetary policy adjustment since Premier Li announced a growth target of about 7 percent for 2015, which would be the slowest since 1990. Li last month said policy makers will step in if growth slows too sharply, while central bank Governor Zhou Xiaochuan flagged room to act.
The Central Bank last cut its reserve requirement in February, when it slashed the rate to 19.5 percent for big banks and 16 percent for small- and medium-sized banks. AP/Bloomberg