China releases $70 billion to banks to prop 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 reduce 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 support the faltering economy.

The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio for banks by 25 basis points (bps), effective December 5. That would lower the weighted average ratio for financial institutions to 7.8%, the central bank said.

The cut, which follows a 25 bp reduction in April, was 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 plentiful.

The PBOC has been tight-fisted on policy, trying to support the slowing economy, but keen to avoid big rate cuts that could fuel 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 slowdown 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 rolled out a flurry of policy measures in recent months to support growth, focusing on infrastructure spending and limited support for consumers, while loosening funding limits to rescue the property sector.

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

Chinese cities have imposed lockdowns and other restrictions to rein in a renewed surge in coronavirus cases, darkening the economic outlook and dampening hopes that China will ease its tough, 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%. Growth for the whole year is expected by analysts to be just over 3%.

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