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

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

Jiang Qiming | China News 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 People̵[ads1]7;s Bank of China (PBOC) said it would cut the reserve requirement ratio for banks by 25 basis points (bps), effective December 5. It will lower the weighted average rate for financial institutions to 7.8%, the central bank said.

The cut, which follows a 25 bp reduction in April, had been widely expected after state media on Wednesday quoted the government as saying China would use timely cuts in the reserve ratio, along with other monetary policy tools, to keep liquidity reasonably good.

The PBOC has taken a tight line on policy, seeking to support the slowing economy but keen to avoid major rate cuts that could lead to 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 broad-based contraction in October, and a recent surge in Covid-19 cases has heightened concerns about growth in the final quarter of 2022. The economy was already under pressure from a property slump and weakening global demand for Chinese goods.

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

The government has in recent months rolled out a series of policy measures to support growth, focusing on infrastructure spending and limited support for consumers, while loosening funding curbs to rescue the property sector.

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

Chinese cities have imposed lockdowns and other curfews to contain a renewed surge in coronavirus cases, darkening the economic outlook and dampening hopes that China will significantly ease its harsh, dissenting stance on COVID anytime soon.

The economy grew just 3% in the first three quarters of this year, well below the annual target of around 5.5%. Full-year growth is expected by analysts to be just over 3%.

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