Published: Mon, January 07, 2019
Markets | By Otis Pena

China Cuts Bank Reserve Ratios by 1% to Boost Economy

China Cuts Bank Reserve Ratios by 1% to Boost Economy

The analysts said the central bank may cut the reserve requirement ratio further, and pump more money into the economy in the form of infrastructure investment and tax cuts.

China will cut banks' reserve requirement ratios (RRRs), taxes and fees, Premier Li Keqiang said on Friday, as the world's second-largest economy shows further signs of cooling.

"At present, the economy is facing very big downward pressure amid internal and external troubles".

The policy move was announced hours after Chinese Premier Li Keqiang told the central bank to make universal cuts of the ratio as part of Beijing's efforts to bolster economic growth having cut the RRR four times a year ago.

"Policy easing will be stepped up further over coming months", Capital Economics said in a research note.

Consumption will remain the main driver of China's economy, as weaker credit growth weighs on investment and slowing global demand and higher United States duties on Chinese good take a toll on the country's exports, the report said. The size of the move was in the upper end of market expectations, Reuters said.

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The People's Bank of China said on Friday that reductions by 0.5 percentage points will be made on January 15th and again January 25th.

The cuts will be effective January 15 and January 25, and come ahead of the long Lunar New Year celebrations when cash conditions often get tight. Early indicators for December signal the economic slowdown is deepening, after official data showed industrial production growth was the weakest in a decade and industrial profits fell for the first time in nearly three years in November.

Analysts at JPMorgan Chase said that the central bank's action suggests that "the Chinese government is tilting toward a growth-oriented stance". But tighter liquidity conditions are possible before the Spring Festival in early February, they said, which requires proper liquidity operations from the central bank to prevent volatility and maintain lower market interest rates.

Economists believe the government could take more fiscal steps by cutting taxes and boosting spending on infrastructure, amid expectations that the budget deficit ratio could be lifted to 3 percent in 2019 from 2.6 percent previous year.

The government maintains 2018 economic growth will still come in on target at around 6.5 percent this year, slowing from 6.9 percent in 2017.

A further deceleration is seen this year, with some analysts forecasting growth will cool to almost 6 percent, which would mark China's weakest expansion since 1990.

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