China’s central bank unexpectedly said that it will reduce the cash banks hold as reserves, a move that frees up lending for small firms but falls short of broad monetary easing, with the authority attaching requirements on how funds must be used, Reuters reports.
Reserve requirement ratios (RRRs) — currently 17 percent for large institutions and 15 percent for smaller banks — will be cut by 100 basis points (bps), the People’s Bank of China (PBOC) said.
The change will be made on April 25 and will apply to most banks with the exception of policy lenders such as China Development Bank.
But the banks must use most of the freed-up liquidity to pay back relatively costly loans obtained via the central bank’s medium-term lending facility (MLF). Based on first-quarter data, the PBOC said the MLF loans due to be repaid on April 25 will be about 900 billion yuan ($143 billion).
Whatever funds the banks have left after repaying their MLF loans must be used to provide loans to small businesses. The PBOC said there will be 400 billion yuan in excess funds after the MLF loan repayments.
The authorities have kept monetary policy in a neutral gear as they continue to clamp down on high corporate debt levels and risky lending practices that might harm China’s financial system. The last time benchmark interest rates were cut was in October 2015.
“Today’s required reserve ratio cut doesn’t constitute broad monetary easing. But it does signal that — despite the recent strength of the official data — policymakers are starting to balance concerns about economic conditions alongside their longstanding desire to contain credit risks,” said Mark Williams, Chief Asia Economist at Capital Economics.
The PBOC’s unexpected decision to cut RRRs came after official data earlier on Tuesday showed China’s economy grew a faster-than-expected 6.8 percent in the first quarter.
Analysts still expect the economy to lose momentum in coming quarters, however, as authorities force local governments to scale back infrastructure projects to contain their debt and property sales cool due to strict controls on purchases to fight speculation.
A full-blown trade war with the United States could also impact billions of dollars in trade.
Net exports overall were already a drag on growth in the first quarter after giving an added boost to the economy last year, highlighting the need for sustained strength in domestic demand if significant new U.S. tariffs are imposed.
“Rising Sino-U.S. trade tensions are clouding the outlook for China’s exports,” said Xu Gao, a Beijing-based economist at Everbright Securities.
“China needs domestic demand to hold up in the face of increasing uncertainties in external demand, so it needs the micro-management of monetary policies to make sure the real economy is stable.”
The PBOC’s last RRR adjustment was on Jan. 25, when most banks saw at least a 50 bps cut to their RRRs as long as the lenders granted more loans to smaller firms and rural communities.
That adjustment was flagged months in advance in late September.
In a Reuters poll this month, the PBOC was forecast to cut RRRs for all banks by only 50 bps in the fourth quarter of 2018. Analysts had expected two additional 25 bps cuts to follow to then to bring the rate down to 16 percent.