China is releasing $70 billion for banks to support its slowing economy

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

Jiang Qiming | Chinese news service | Getty Images

China said on Friday it would reduce 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 support the faltering economy.

The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio for banks by 25 basis points (bps), effective December 5. That would lower 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 quoted the cabinet on Wednesday that China would use timely reserve ratio cuts, among other monetary policy tools, to keep liquidity reasonably ample.

The PBOC is keeping a close eye on policy, trying to support the slowing economy, but keen to avoid major interest rate cuts that could fuel inflationary pressures and risk an outflow from China as the Federal Reserve and other central banks raise interest rates to lower inflation to combat.

The world’s second-largest economy experienced a broad slowdown in October, and a recent spike in COVID-19 cases has added to growth concerns in the last quarter of 2022. The economy was already under pressure from a real estate crisis and declining global demand for Chinese goods.

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

The government has launched a flurry of policy measures in recent months to support growth, focusing on infrastructure spending and limited support for consumers, while easing funding restrictions to rescue the real estate sector.

On Wednesday, the PBOC released a notice outlining 16 steps to support the real estate industry, including extending loan amortization, in a major move to ease the liquidity crisis that has plagued the industry since mid-2020.

Chinese cities have imposed lockdowns and other restrictions to curb a renewed surge in coronavirus cases, clouding the economic outlook and dampening hopes that China will soon significantly ease its tough, divergent stance on COVID.

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

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