 "China moves to stimulus mode with reserve rate cut")
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 (RRR) will be lowered 1 percentage point effective April 20, the People's Bank of China said on its website Sunday, the second reduction this year and the largest since November 2008. The level will decline to 18.5 per cent, still high by global standards, based on previous statements.
The move puts China more firmly in the easing camp with the European Central Bank and the Bank of Japan and 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 cut will allow banks to boost lending, unleashing about 1.2 trillion yuan ($194 billion) (Rs 1,213,479 crore), and may spur another leg higher in the nation's booming stock market.
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. The world's second-largest economy also is contending with an outflow of capital and slowing domestic production that threatens the job creation needed to keep urbanisation going.
Gross domestic product expanded seven per cent 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, fuelling speculation the central bank sold holdings to support the yuan as money flowed out of China. "The move is positive, showing policy makers are trying to offset the impact of potential capital outflow and stabilise the macro environment," said Helen Qiao, Hong Kong-based chief greater China economist at Morgan Stanley.
Banks including Macquarie Group Ltd, HSBC Holdings Plc, and Nomura Holdings Inc had flagged the need for further stimulus after the GDP report and March indicators, which also showed an unexpected slump in exports.
"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."
Li and President Xi Jinping are seeking to rein in the excesses of a three-decade-long economic boom that lifted millions out of poverty while polluting skies and rivers, generating industrial overcapacity and a debt pile that threatens the nation's continued expansion.
Some of their platform, such as a crackdown on corruption and state largess, is putting a brake on short-term economic growth.
"Policy makers are quite concerned," said Larry Hu, head of China economics at Macquarie in Hong Kong. He expects an interest-rate cut within a month, increasing infrastructure spending and a further relaxation of home-purchasing rules.
Reluctant banks
The "darkest period" this year was the first quarter, and the economy will pick up in the second quarter as policy easing measures kick in and the property market recovers, Hu said. "Li Keqiang is nervous, but he isn't panicking yet."
A crackdown on shadow banking and the reluctance of banks to lend to small business in the face of rising bad loans is making access to credit tough for the private businesses Xi and Li are seeking to spur with pro-market policies. An additional hurdle is the booming stock market, which is being driven higher as more than a million people a week open brokerage accounts to pile in.
"Liquidity has strong incentive to flow to the stock market boom," said Hu Yifan, chief economist at Haitong International Securities Group Ltd in Hong Kong. "This round of cuts could further push up the fever."
The RRR cut is the first major monetary policy adjustment since Premier Li announced a growth target of about seven per cent for 2015, which would be the slowest since 1990.
The reserve ratio will be reduced by another percentage point for rural financial institutions, two additional percentage points for Agricultural Development Bank and a further 0.5 percentage point for banks with a certain level of loans to agriculture and small enterprises.
Those extra reductions give the move a "reformist flavour," wrote Bloomberg Economists Tom Orlik and Fielding Chen. Still, with growth weak and small companies most at risk, it's understandable banks see state-owned firms as safer bets.
"As ever, the price of stronger growth is slower progress on structural reform," they wrote.
The reserve-requirement ratio (RRR) will be lowered 1 percentage point effective April 20, the People's Bank of China said on its website Sunday, the second reduction this year and the largest since November 2008. The level will decline to 18.5 per cent, still high by global standards, based on previous statements.
The move puts China more firmly in the easing camp with the European Central Bank and the Bank of Japan and 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 cut will allow banks to boost lending, unleashing about 1.2 trillion yuan ($194 billion) (Rs 1,213,479 crore), and may spur another leg higher in the nation's booming stock market.
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"This RRR cut is much bigger than the market anticipated and banks will be flooded with liquidity," said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd in Hong Kong. "It will also add fuel to the already red hot stock market."
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. The world's second-largest economy also is contending with an outflow of capital and slowing domestic production that threatens the job creation needed to keep urbanisation going.
Gross domestic product expanded seven per cent 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, fuelling speculation the central bank sold holdings to support the yuan as money flowed out of China. "The move is positive, showing policy makers are trying to offset the impact of potential capital outflow and stabilise the macro environment," said Helen Qiao, Hong Kong-based chief greater China economist at Morgan Stanley.
Banks including Macquarie Group Ltd, HSBC Holdings Plc, and Nomura Holdings Inc had flagged the need for further stimulus after the GDP report and March indicators, which also showed an unexpected slump in exports.
"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."
Li and President Xi Jinping are seeking to rein in the excesses of a three-decade-long economic boom that lifted millions out of poverty while polluting skies and rivers, generating industrial overcapacity and a debt pile that threatens the nation's continued expansion.
Some of their platform, such as a crackdown on corruption and state largess, is putting a brake on short-term economic growth.
"Policy makers are quite concerned," said Larry Hu, head of China economics at Macquarie in Hong Kong. He expects an interest-rate cut within a month, increasing infrastructure spending and a further relaxation of home-purchasing rules.
Reluctant banks
The "darkest period" this year was the first quarter, and the economy will pick up in the second quarter as policy easing measures kick in and the property market recovers, Hu said. "Li Keqiang is nervous, but he isn't panicking yet."
A crackdown on shadow banking and the reluctance of banks to lend to small business in the face of rising bad loans is making access to credit tough for the private businesses Xi and Li are seeking to spur with pro-market policies. An additional hurdle is the booming stock market, which is being driven higher as more than a million people a week open brokerage accounts to pile in.
"Liquidity has strong incentive to flow to the stock market boom," said Hu Yifan, chief economist at Haitong International Securities Group Ltd in Hong Kong. "This round of cuts could further push up the fever."
The RRR cut is the first major monetary policy adjustment since Premier Li announced a growth target of about seven per cent for 2015, which would be the slowest since 1990.
The reserve ratio will be reduced by another percentage point for rural financial institutions, two additional percentage points for Agricultural Development Bank and a further 0.5 percentage point for banks with a certain level of loans to agriculture and small enterprises.
Those extra reductions give the move a "reformist flavour," wrote Bloomberg Economists Tom Orlik and Fielding Chen. Still, with growth weak and small companies most at risk, it's understandable banks see state-owned firms as safer bets.
"As ever, the price of stronger growth is slower progress on structural reform," they wrote.