China Cuts Banks’ Reserve Requirements in Bid to Stimulate Slowing Economy

Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing on Sept. 28, 2018. (Jason Lee/Reuters)

China’s central bank has announced that it would reduce the amount of cash that banks must hold in reserve, unlocking $188 billion in long-term liquidity to shore up slowing economic growth.

The People’s Bank of China (PBOC) stated on its website on Dec. 6 that it would lower the reserve requirement ratio (RRR) for banks by 0.5 percentage points, effective Dec. 15. This would be the second time in 2021 that the PBOC has reduced the reserve requirement, with the announcement coming after Chinese Premier Li Keqiang flagged the move last week as a way to bolster the economy in the face of headwinds.

Momentum has slowed in China’s economy in recent months, as it contends with a slowing manufacturing sector, debt problems in the property market, and persistent COVID-19 outbreaks.

“The RRR reduction will help alleviate the downward pressure on the economy and smooth the economic growth curve,” Wen Bin, a senior economist at Minsheng Bank, told Reuters.

China’s central bank stated that the five-basis-point reduction won’t apply to banks with an existing RRR of 5 percent, with the cut allowing most financial institutions to maintain a reduced average ratio of 8.4 percent.

An earlier RRR cut, announced in July, released around $157 billion worth of liquidity into China’s economy.

In its Dec. 6 announcement, the Chinese central bank sought to portray the RRR cut as part of its routine “sound monetary policy,” stating that it would “refrain from indiscriminate liquidity injection,” with a policy of keeping the money supply and the flow of credit to the real economy “basically in line with the nominal GDP [gross domestic product] growth.”

The Chinese Academy of Social Sciences (CASS), a top regime think tank, said on Dec. 6 that it expects China’s economy to grow by around 5.3 percent in 2022, slower than the 8 percent CASS has estimated for 2021.

PBOC’s remarks about not flooding the system with stimulus come amid concern that unsustainable levels of debt in China’s beleaguered property sector might spark a financial crisis.

China wants to avoid a bailout, but also is unlikely to let the situation deteriorate to the point where problems would cascade to that level. A number of Chinese real estate companies have run into trouble as the regime has pushed to reduce debt levels.

Craig Botham, chief China economist at Pantheon Macroeconomics, wrote on Twitter that PBOC’s decision to cut the reserve ratio is a clear sign that things are getting worse.

“We said in a note to clients on Friday that we‘d see a RRR cut this week. Don’t be fooled by this ’routine' talk, things are clearly deteriorating,” Botham said. “As recently as Friday, the PBOC maintained everything was fine. Obviously not.”