PBOC cuts RRR by 1%

Wads of red Chinese 100 yuan notes

China's central bank on Friday cut the ratio of cash that banks must hold as reserves by 100 basis points, or 1%, Reuters and other news outlets reported.

Bank officials say the measure will unleash 800 billion yuan, or about 116 billion dollars, into the market and effectively increase loan funding sources of small and private businesses. China International Capital Corp said that may release as much as 400 billion yuan of liquidity.

The order from Li to the central bank, which is part of the Chinese government, showcased Beijing's willingness to go further in policy easing to keep its economic growth on track.

China cut the amount of cash banks need to set aside as reserves four times a year ago as the nation struggled with slower economic growth, record corporate bond defaults and a trade war with the US.

Richard Xu, head of China Banking and Fintech Research at Morgan Stanley, said that a further RRR cut is necessary to ensure adequate credit supply.

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

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There were reports that lower prices for oil-related inputs had helped to moderate the overall rate of cost inflation in December. Increased staffing levels were widely linked to new product launches and long-term investment in additional plant capacity.

On Wednesday, the PBOC changed the definition of a small business, meaning an enterprise with a credit line of less than 10 million yuan will qualify for targeted RRR cuts, up from the previous standard of 5 million yuan.

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. One big wild card is how the trade war between the United States and China will play out in 2019. "The central bank has been handing liquidity to the banks, but the banks are unwilling to lend".

Analysts at JPMorgan Chase said that the central bank's action suggests that "the Chinese government is tilting toward a growth-oriented stance".

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 government has also ramped up spending on infrastructure to rekindle sluggish demand and investment.

China's economy grew at an annualized rate of 6.5 percent in the July-September period of 2018.

A further deceleration is seen this year, with some analysts forecasting growth will cool to just over 6 percent.

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