China frees up $70 billion for banks to prop up slowing economy

A man walks past the People’s Bank of China (PBOC) building on July 20, 2022 in Beijing, China.

Jiang Qiming | Chinese Intelligence Service | Getty Images

China said on Friday it would cut the amount of cash banks must hold as reserves for the second time this year, freeing up about 500 billion yuan ($69.8 billion) in long-term liquidity to shore up the faltering economy.

The People’s Bank of China (PBOC) said it will cut the reserve requirement ratio for banks by 25 basis points (bps) effective December 5. This would reduce the weighted average ratio for financial institutions to 7.8%, the central bank said. .

The cut, which follows a 25 basis point cut in April, was widely expected after state media on Wednesday quoted the cabinet as saying China would use a timely reduction in the reserve ratio along with other monetary policy tools to keep liquidity reasonably high.

The PBOC has been walking a tightrope trying to shore up the slowing economy, but eager to avoid big rate cuts that could stoke inflationary pressures and risk outflows from China as the Federal Reserve and other central banks raise interest rates to fight inflation.

The world’s second-largest economy suffered a wide-ranging slowdown in October, and a recent spike in COVID-19 cases deepened concerns about growth in the final quarter of 2022. The economy was already under pressure from a slump in real estate and weaker global demand for Chinese goods.

On Monday, the central bank left its key interest rates unchanged for a third straight month as a weaker yuan and persistent capital outflows limited Beijing’s ability to loosen monetary conditions to support the economy.

The government has introduced a flurry of growth-boosting policy measures in recent months, targeting infrastructure spending and limited consumer support while easing financial restrictions to rescue the property sector.

On Wednesday, the PBOC issued a notice outlining 16 steps to support the real estate sector, including extending loan repayments, as part of a major push to ease the liquidity crisis that has plagued the sector since mid-2020.

Chinese cities have imposed lockdowns and other restrictions to contain a renewed surge in coronavirus cases, darkening the economic outlook and dimming hopes that China will soon significantly soften its tough and aloof stance on COVID.

The economy grew by just 3% in the first three quarters of this year, well below the annual target of around 5.5%. Analysts generally expect full-year growth to be just above 3%.

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