China’s central bank is freeing up nearly $175 billion to get commercial banks to boost their lending and pay off short-term borrowings, the latest effort by Beijing to lift growth in a slowing economy as its trade fight with the U.S. escalates.
In a statement Sunday, the People’s Bank of China said it would reduce the amount of reserves most commercial banks are required to hold by 1 percentage point, effective Oct. 15.
The move comes as the U.S. has imposed tariffs on $250 billion of Chinese goods and has vowed additional import taxes on $257 billion of products.
Chinese leaders are eager to get ahead of any potential economic impact of the trade spat and boost confidence in a flagging stock market, economists say. Stocks in Shanghai have sunk about 15% since the beginning of the year, while the yuan has weakened by more than 9% against the U.S. dollar since mid-April.
The central bank said the cut will free up 1.2 trillion yuan ($174.72 billion) in total. Of that, 450 billion yuan ($65.52 billion) will be for banks to repay short-term debt coming due this month and 750 billion yuan will be released into the financial market. Big Chinese banks will face a reserve-requirement ratio of 14.5%, down from 15.5% currently.
The cut in the reserve-requirement ratio, coming after a weeklong holiday on the Chinese mainland, was widely expected. Chinese leaders have already lowered banks’ reserve-requirement ratios three times this year, and rolled out fiscal measures such as reducing individual income taxes and urging local governments to boost infrastructure spending.
“In the current trade-war situation, they don’t want to be seen with a weak economy,” Ding Shuang, an economist at Standard Chartered, said of policy makers’ intentions. “They are very serious about the growth target this year.”
The latest round of U.S. tariffs on $200 billion of Chinese goods took effect last month. At the beginning of next year, the Trump administration plans to raise tariffs on these products to 25% from 10% currently.
The punitive measures are already taking a toll on Chinese manufacturing. Privately owned makers of cars, machinery and other products stopped expanding in September as export orders dropped, while output by large, state-owned manufacturers continued to weaken.
Economists also expect the U.S. tariffs on Chinese goods to weigh on China’s export sector by next year. Fitch Ratings last month lowered its 2019 China growth forecast by 0.2% to 6.1%, citing concerns about trade tensions with the U.S.
Beijing’s efforts to keep the economy growing carry risks. Analysts say the latest easing move will likely put pressure on an already depreciating Chinese yuan. A weaker currency would help Chinese exporters that are already bruising from the trade fight, but too much depreciation risks stoking concerns about the Chinese economy and capital outflows.
Policy makers have the option of supporting the currency, including by strengthening capital controls, Zhang Ming, an analyst at state think tank Chinese Academy of Social Sciences, wrote in a note after the PBOC cut. It is unlikely the yuan will weaken beyond 7 per dollar, he added.
Economists say they believe a major stimulus package similar to the one Beijing used after the 2008 financial crisis is unlikely because this year’s growth remains on track to reach the government’s target of about 6.5%.
Too much policy easing risks undoing the progress authorities have made to keep high debt levels in check. Easy access to credit for much of the past decade has driven up Chinese debt to more than 240% of GDP as of end-2017; efforts over the past two years to control debt have reined in leverage within the financial system, but not the broader economy.
Further complicating Beijing’s efforts to prop up the economy are concerns about rising consumer prices, in part fueled by a recent outbreak of African swine fever that caused a shortage of pork, as well as skyrocketing rental prices in many Chinese cities.
Targeted measures in recent years haven’t alleviated funding pressures for small- and medium-size private enterprises, as banks see smaller businesses as riskier and prefer lending to state-owned firms. Economists expect policy makers to unveil further easing through fiscal measures and potentially more cuts to banks’ reserve-requirement ratios. “The intention is to shift to a neutral policy with an easing bias,” said Standard Chartered’s Mr. Ding.
The central bank has so far refrained from raising interest rates after the Federal Reserve lifted its benchmark rate in September. Higher rates in the U.S. tend to strengthen the dollar, putting stress on emerging-market currencies.
Chinese policy makers have so far avoided cutting the benchmark rate, as that would be viewed by investors as a more drastic easing measure than reducing banks’ reserve-requirement ratios. Such a move risks putting even more pressure on the yuan and further diluting Beijing’s efforts to control debt.
Source: Dow Jones
