China’s reduction in bank reserve ratios helps combat slow economic growth

China’s central bank begins implementing new incentives and cuts bank reserve requirements by largest amount since global financial crisis in order to stimulate lending into slowing economy

Updated Jul 28, 2015

Central bank of world’s second largest economy implemented its second industry-wide cut in two months to the amount of cash lenders must put aside Sunday, in order to help inject liquidity into the country’s sluggish economy.

It was already expected that China would take such an action with last week’s data showing that Gross Domestic Product (GDP) grew at a slow annual rate of 7 percent in the first three months matching the median estimate of both government and economists. However, concerns have increased as the lethargic economy puts pressure on the Chinese government to increase policy stimulus, as sluggish growth can increase unemployment and debt defaults.

China’s Finance Minister, Lou Jiwei stated that “although the Chinese economy is facing downward pressure, the Chinese government has sufficient policy tools.”

Weak demand and weakening producer pricing power are making executives cautious on making new investments. Policy makers are caught between those advisors calling for more stimulus to combat the slowdown and others who see structural reforms as the key to sustainable growth.

In response, the reserve requirement ratio (RRR) was lowered by the People’s Bank of China (PBOC) Monday by 100 basis points to 18.5 percent. This stimulus could generate up to one trillion yuan ($ 161.2 billion) worth of cash flow into the slowing Chinese economy. Although the cut was larger than predicted, it is expected to improve liquidity shortages in the banking system and assist bank lending.

Banking stocks are also expected to benefit from China’s quantitative easing if PBOC’s new incitement generates lending and brings down costs for struggling companies.

Prior to PBOC’s economic stimulus, investors had prepared themselves for a selloff as growing concerns of Greek default continue. European shares opened higher and the Australian dollar also rose against the U.S dollar.

The Chinese stimulus also helped boost oil prices. Brent crude LCOc1 also increased by 30 cents at $63.79 a barrel.

TRTWorld and agencies