China central bank lowers reserve requirement ratio

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(Bloomberg Opinion) — China’s central bank cut the amount of money financial institutions must hold on reserve for the second time this year, stepping up support for an economy hurt by rising Covid cases and continued fall of the real estate sector.

The People’s Bank of China lowered the minimum reserve requirement ratio for most banks by 25 basis points, the bank said in a statement on Friday. The adjustment takes effect on December 5 and will inject 500 billion yuan ($70 billion) of liquidity into the economy.

The cut is aimed at “maintaining reasonably ample liquidity” and “increasing support for the real economy” as well as helping banks support industries affected by the Covid pandemic, the central bank said in a separate statement.

The coefficient reduction, the first since April, was announced earlier this week by the State Council, China’s cabinet, which called for more efforts to consolidate the economic recovery. The central bank has also cut its key interest rates twice this year, most recently in August.

The central bank’s move follows important measures recently taken by the government to help the economy, including a rescue package for the real estate sector and an adjustment of some covid restrictions to reduce the impact on the economy.

However, growth prospects remain complex. The recovery of the housing market will likely be slow, while covid cases have soared to record levels, prompting big cities like Beijing to restrict the movement of residents.

Economists say China will likely face a slow and painful process in trying to reopen the country, while Nomura Holdings Inc. this week cut its 2023 economic growth forecast to 4%.

What Bloomberg Economics says…

“With the proliferation of covid outbreaks – which cause new restrictions on activity – and the slowdown in global growth, it will not be easy for the economy. Given this scenario, we expect the PBOC to maintain a gradual easing stance until 2023.”

“Looking forward to next year, we expect the PBOC to cut the required reserve ratio by another 50 basis points. It is also likely to cut the one-year medium-term lending facility rate, a key policy rate, by 20 basis points. We believe it will do so in two moves, with the first cut of 10 basis points in the first quarter of 2023.”

— David Qu, economist

Original Note: China Central Bank Boosts Stimulus to Aid Covid-Hit Economy (1)

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