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China to Release $200 Billion for Banks With Cut in Reserve Requirement

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04/17/2018 | 01:59pm CEST

By Lingling Wei

BEIJING--China's central bank said it would free up more than $200 billion for banks to lend and repay short-term loans, signaling fresh worries about slowing momentum for economic growth amid rising trade tensions with the U.S.

The People's Bank of China said Tuesday that the amount of reserves commercial banks are required to hold would be reduced by 1 percentage point. The cut, which takes effect on April 25, will unleash about 1.3 trillion yuan in funds.

Banks must use 900 billion yuan to pay off short-term debts owed to the central bank, the People's Bank said, while the remaining 400 billion yuan can be used toward new lending by banks.

The announcement came just hours after China reported a 6.8% growth rate for the first quarter. While the pace beat expectations for a slowdown--thanks to surprisingly strong exports, resilient retail sales and factory output--there are signs that the growth momentum is ebbing. Chinese factories in particular are producing fewer goods for foreign markets, official data show.

In a statement, the People's Bank said the reduction in the reserve requirement would help lower funding costs for banks and make it easier for small and private businesses to get loans. The central bank will continue its "neutral" monetary stance, while ensuring adequate liquidity in the financial system, the statement said.

The reserve-requirement ratio varies depending on the size of the bank. At 17% of all deposits for big banks, the ratio is among the highest in the world. Such a ratio is 15% for smaller banks.

The central bank used to raise or reduce the reserve requirement frequently to cool or augment growth. In the past two years, though, it has refrained from using that traditional monetary-policy tool out of concern that more lending could weaken the yuan, causing capital flight, and undermine a government effort to reduce corporate debt and other financial risks.

Instead, the central bank has used short-term fund injections into the financial system to ensure adequate liquidity.

Now, the Chinese currency has largely stabilized, and outflows have eased. Those factors, many economists and analysts have said, give the central bank a window of opportunity to act.

Write to Lingling Wei at [email protected]

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