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China’s PBOC Details Reserve Ratio Cut Aimed At Regional Lenders
Perspective | 12 June 2014

China’s central bank announced a 0.5 percentage point cut in reserve requirements for some banks, giving details of a policy move aimed at supporting smaller companies and agriculture.

The reduction will take effect 16 June, the People’s Bank of China (PBOC) said in a statement on its website on 9 June. The reduction applies to two-thirds of city commercial banks, 80 percent of non-county level rural commercial banks and 90 percent of non-county level rural cooperative banks.

Falling imports in May showed the weakness in domestic demand that is making the Chinese economy more reliant on exports and pressuring Premier Li Keqiang to roll out broader measures to support growth. The authorities’ steps have so far included tax breaks and accelerating some government spending as a property slowdown limits the nation’s expansion.

‘Ample’ Liquidity
“Overall liquidity is appropriately ample and the basic direction of monetary policy is unchanged,” the PBOC said in a statement dated 9 June. “The PBOC will continue implementing a prudent monetary policy, keep appropriate liquidity, achieve reasonable and appropriate growth in money, credit and aggregate financing, and promote healthy and stable economic operations.”

Combining the move with other liquidity injections including a 25 April cut to reserve ratios for rural banks, the central bank will inject about Rmb545 billion of liquidity by the end of June, according to Zhang Zhiwei, chief China economist at Nomura Holdings in Hong Kong.

The PBOC announcement came after the State Council said 30 May that policy makers will “appropriately” lower the reserve requirement for banks that have extended a certain amount of loans to rural borrowers and smaller companies.

Currency Bets
Yuan forwards jumped the most since January 2012 on 9 June after the central bank boosted the currency’s reference rate and an unexpected decline in imports saw China’s May trade surplus increase to the biggest in five years.

Overseas shipments gained 7 percent from a year earlier, the customs administration said 8 June in Beijing, exceeding the 6.7 percent median forecast in a Bloomberg News survey. Imports fell 1.6 percent, leaving a US$35.9 billion surplus.

Manufacturing indexes for May have pointed to China’s economy stabilising.

Earlier government data showed growth in factory production unexpectedly slowed in April from a year earlier to 8.7 percent, and fixed-asset investment excluding rural households increased 17.3 percent in the first four months of the year, the weakest for the period since 2001.

“The selective required-reserve ratio cut will have the least impact to a ‘broad’ Chinese economy, among those of the stimulus implemented so far in second quarter,” Jimmy Zhu, a Singapore-based economist at FXPrimus wrote in an e-mail. “We expect those ‘pro-growth’ measures to start cooling off in the middle of the third quarter when the economy stabilises.”

Economic Expansion
The world’s second-largest economy expanded 7.4 percent in the January-to-March period from a year earlier, the weakest pace in six quarters.

Australia & New Zealand Banking Group (ANZ) estimated in April that a nationwide reserve-ratio cut of a half percentage point would unlock about Rmb500 billion (US$80 billion) in funds. The central bank in April lowered the reserve ratio for some rural banks by as much as 2 percentage points, a move ANZ said would release as much as Rmb100 billion.

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