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China empowers banks to pump $109 bn into economy hit by trade war

Beijing has stepped up liquidity support across the financial system this year as policymakers have focused on calming fears of capital outflows

Reuters  |  Beijing 

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China's central on Sunday announced a steep cut in the level of cash that banks must hold as reserves, stepping up moves to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the

The reserve requirement cut, the fourth by the People's of (PBOC) this year, comes as has pledged to expedite plans to invest billions of dollars in infrastructure projects as the shows signs of cooling further, with investment growth slowing to a record low.

Reserve requirement ratios (RRRs) - currently 15.5 per cent for large commercial lenders and 13.5 per cent for smaller banks - would be cut by 100 basis points effective Oct. 15, the PBOC said, matching a similar-sized move in April.

Economists predicted further cuts ahead.

has stepped up liquidity support across the financial system this year as policymakers have focused on calming fears of capital outflows and sought to soothe battered markets even as anxiety grows that a heated trade war with the could deal a damaging blow to the broader

China's yuan currency has faced strong selling pressure this year, losing over 8 per cent between March and August at the height of market worries, though it has since cut losses as authorities stepped up support.

Sunday's move will inject a net 750 billion yuan ($109.2 billion) in cash into the system by releasing a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of that to offset maturing medium-term lending facility (MLF) loans.

The RRR cut, announced on the last day of China's week-long National Day holiday, indicates that the central is worried about the impact of "external shocks" to markets such as a speech last week by U.S. Vice Mike Pence, said Zhang Yi, at

Pence intensified Washington's pressure campaign against on Thursday by accusing of "malign" efforts to undermine U.S. ahead of next month's and reckless military actions in the Sea.

Pence's speech marked a sharpened U.S. approach toward China, going beyond the bitter trade war between the world's two biggest economies, which has magnified concerns about the outlook for China's

Weakening exports were already a drag on growth in the first half of the year after giving an added boost to the economy last year, highlighting the need for sustained strength in domestic demand if significant new U.S. tariffs are imposed.

The "very timely" RRR cut is big enough to help boost confidence in the economy, said Xu Hongcai, deputy at the for International Economic Exchanges, a Beijing think tank.

"The trade war's impact on the economy is showing. There is room for further reductions and I expect another 1 percentage point cut by the year-end," Xu added.

The said on Sunday it would continue to take necessary measures to stabilise market expectations, while maintaining a prudent and neutral monetary policy.

The PBOC would "maintain reasonably ample liquidity to drive the reasonable growth of monetary credit and social financing scale," it said.

The RRR cut would not create depreciation pressure on the yuan, the PBOC said, adding that the would keep the foreign exchange markets stable.

SOFTENING FOCUS ON CUTTING DEBT

With China's economy cooling and the full impact of U.S. trade tariffs still to be felt, policymakers are shifting their priorities to reducing risks to growth, with the yuan and stock markets under pressure.

China's economic growth rate slowed slightly to 6.7 per cent in the second quarter year-on-year, still well above the government's full-year target of around 6.5 per cent. But some key activity indicators have weakened more sharply.

Fixed-asset investment is growing at the slowest pace on record, while non-performing loans surged in the second quarter and defaults climbed. The July nationwide jobless rate rose to 5.1 per cent.

Smaller companies, in particular, are having a tough time securing loans and are grappling with rising borrowing and operating costs, fueled in part by a lengthy official clampdown on riskier lending like shadow

The weighted average lending rate for non-financial firms, which reflects corporate funding costs, inched up 1 basis point in the second quarter to 5.97 per cent, following a rise of 22 basis points in the first quarter and 47 basis points in 2017.

China's regulator has asked banks to significantly lower funding costs for smaller firms and raise their tolerance for non-performaning ratios for loans to small and micro firms.

China's politburo and state council have also replaced use of the term "deleveraging" with "structural deleveraging", a change that suggests less harsh curbs on debt.

"Liquidity is flush in the banking system. The key question is how to channel cash to the real economy," said Zhang Yiping, at in

"The external environment is becoming tougher and we cannot rule out further RRR cuts," Zhang said.

First Published: Sun, October 07 2018. 14:45 IST
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