China steps up economy help with reduced bank reserve ratios

China’s leaders swung into stimulus mode, cutting the amount of cash lenders must set aside as reserves by the most since the global financial crisis just days after a report showed the slowest economic growth in six years.
The reserve-requirement ratio was lowered 1 percentage point yesterday, the People’s Bank of China said. While that was the second reduction this year, the new level of 18.5 percent is still high by global standards. The cut will allow banks to boost lending by about 1.2 trillion yuan (USD194 billion).
Interest-rate swaps declined to the lowest level since 2012 after the move put China more firmly in the easing camp with the European Central Bank and the Bank of Japan. The cut follows a vow by Premier Li Keqiang last month to step in if the economy’s slowdown hurts jobs as well as PBOC Governor Zhou Xiaochuan’s weekend comment that China has room to act.
“The PBOC’s easing remains ‘defensive’ in nature,” said Stephen Jen, co-founder of hedge fund SLJ Macro Partners LLP in London and former head of currency research at Morgan Stanley. “Capital outflows have continued, and this has led to a contraction in China’s base money. To offset this, the PBOC needed to take actions to increase the money multiplier.”
Chinese stocks fell yesterday after the regulator on Friday moved to cut leveraged trading and expand short selling. Metals prices and the Australian dollar advanced.
The reduction adds to the PBOC’s own monetary easing and that of about 30 counterparts around the world this year as policy makers confront the risk of excessively low inflation.
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. Foreign-exchange reserves dropped the most on record last quarter, fueling speculation the central bank sold holdings to support the yuan as money flowed out of China.
“Although the Chinese economy is facing downward pressure, the Chinese government has sufficient policy tools,” Finance Minister Lou Jiwei said, the official Xinhua News Agency reported yesterday. “China is able to achieve the growth target of about 7 percent.” Bloomberg