BCN-37-38 China’s RRR cut to increase support for real economy : Economic Watch

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China’s RRR cut to increase support for real economy : Economic Watch

BEIJING, Oct. 17, 2018 (BSS/Xinhua) – China’s central bank has lowered the
level of cash that lenders must hold as reserves for the fourth time this
year in its latest effort to support stable credit growth and shore up the
economy.

Effective Monday, the reserve requirement ratio (RRR) was reduced by 1
percentage point, according to the People’s Bank of China (PBOC).

Part of the liquidity unleashed, worth around 450 billion yuan (around 65
billion U.S. dollars), was used to pay back the medium-term lending facility
maturing Monday, while the other 750 billion yuan would be pumped into the
market, the PBOC said in a statement.

Compared with previous cuts in January, April, and June, Monday’s move is
bigger in terms of the amount of money unleashed for lenders, said Zou
Hengchao with China Merchants Securities.

The primary goal is to step up capital support for the real economy and
stabilize economic growth and market expectations, analysts said.

It also came as part of a government campaign to ease financing strains for
cash-starved small- and medium-sized enterprises (SMEs) which have been
affected by a domestic clean-up in the financial sector and escalated trade
friction.

“The RRR cut has provided cheaper and stable long-term funding for banks,
and we think it could help stabilize broad credit growth,” said a research
note from Morgan Stanley.

The investment bank’s chief China economist Robin Xing said the total
social financing (TSF) has shown signs of stabilization, the growth of new
loans have picked up the pace, and bill financing has returned to the
positive territory. “Better lending to SMEs could support export-oriented
enterprises.”

The cost of funds is retreating. The overnight Shanghai Interbank Offered
Rate, which measures the cost at which banks lend to one another, fell 0.4
basis points to 2.373 percent Tuesday, significantly down from five-day, 10-
day, and 20-day averages.

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Analysts agreed that the funds directed into the economy will not boost the
property sector, which usually rallies on such pro-growth policies, as home
purchase restrictions still bite, and the impact on the Chinese yuan, which
is under a weakening trend, will also be limited.

China has reduced the RRR for banks by 2.5 percentage points year to date,
and further moves are on the cards, which, however, does not mean a shift in
China’s stance on its monetary policy.

PBOC governor Yi Gang on Sunday said the monetary policy maintained prudent
and neutral, neither too loose nor too tight, at the G30 International
Banking Seminar 2018, responding to concerns that credit supply is being
eased.

The broad money supply growth was well-matched by nominal GDP growth, and
the TSF expanded at an around-10-percent reasonable pace, Yi said, adding
that the country still has plenty of policy tools.

China’s policymakers have carried out a raft of measures to ensure the
economy could hold steady against increasing global uncertainties, while also
striving for progress in areas including industrial restructuring and
financial deleveraging.

The economy has shown strong resilience with steady factory activity and
robust consumption.

Morgan Stanley’s Xing said the investment bank maintained its forecast on
China’s GDP growth in 2018 at 6.6 percent, highlighting the role of
consumption in sustaining growth despite downward pressures.

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