By Yawen Chen and Kevin Yao
BEIJING (Reuters) – China’s central bank cut the cash that banks must hold as reserves on Friday for the second time this year, releasing 550 billion yuan ($79 billion) to help its coronavirus-hit economy.
The targeted reserve requirement cut is Beijing’s latest step to cushion the economic blow of the coronavirus outbreak amid worries about job losses, with more stimulus expected.
“The reserve cut will help supplement liquidity at the end of the quarter, increase the space for boosting credit and promote the rapid recovery of the economy,” said Tang Jianwei, senior economist at Bank of Communications.
China’s central bank has been encouraging banks to lend more to small firms and other vulnerable sectors under its inclusive financing push, and has urged lenders to extend cheap loans and tolerate late payments from companies hit by the health crisis.
“The reduction will also give confidence to the financial market to some extent, in response to the pessimism of the recent decline in global capital markets,” Tang added.
The People’s Bank of China (PBOC) said on its website that it would cut the reserve requirement ratio (RRR) by 50-100 basis points (bps) for banks that have met inclusive financing targets. The RRR for large banks is currently 12.5%.
Qualified joint-stock commercial banks would enjoy an additional cut of 100 bps, it added of the targeted cut, the ninth since early 2018, which will be effective from March 16.
Financial markets had widely expected more support measures from the government and the PBOC to get the economy back on a steadier footing. The country’s cabinet on Wednesday flagged more bank reserve cuts and other steps.
The amount of liquidity released by the RRR cut would be smaller than the 800 billion yuan cut in January.
The PBOC has been ramping up policy easing since the coronavirus outbreak escalated in late January. China has cut several key interest rates, and some analysts are expecting another cut in the benchmark lending rate next week.
The PBOC reiterated on Friday that monetary policy would remain prudent, even if it is more flexible in prioritizing restoring economic growth. It said it would not open the credit floodgates, which led to a rapid build-up in debt in the past.
The government has also rolled out fiscal support steps, including more funding for virus fight, tax waivers, cuts in social insurance fees and subsidies for firms.
Analysts said expanding credit alone may not be enough to boost growth in the near-term given the slow resumption in production among small factories.
“Liquidity conditions in China are loose, and it remains to be seen whether the additional funds can enter the entity effectively,” said Yang Yewei, analyst at Southwest Securities.
“The constraints of credit expansion mainly lie in labor, logistics and order constraints, which cause slow resumption of production.”
Analysts at UBS said in a note last week that they expected another 100 bps of RRR cuts for the remainder of 2020, a further 10 bps of medium-term lending facility (MLF) rate cuts, and possibly a deposit benchmark rate cut of no more than 25 bps later after consumer inflation eases notably.
Analysts polled by Reuters expected China’s economic growth to tumble to 3.5% in the first quarter year-on-year from the previous quarter’s 6.0%. Some believe it may even have shrank on a quarter-on-quarter basis.
Data on Saturday showed China’s exports contracted sharply in the first two months of the year, and imports declined, as the health crisis triggered by the coronavirus outbreak caused massive disruptions to business operations, global supply chains and economic activity.
For the year, growth was expected to slow to 5.4%, which would be the slowest since 1990.
Policy sources have said Chinese policymakers are debating whether to lower the planned 2020 economic growth target of around 6%, which was tentatively agreed late last year. Many private sector economists see that as well beyond China’s reach at this point.
China has yet to issue its 2020 target as the annual parliament meeting, which originally scheduled to open on March 5, has been postponed due to the virus outbreak.
($1 = 6.9780 Chinese yuan renminbi)
(Reporting by Kevin Yao, Yawen Chen, Stella Qiu and Ryan Woo; Editing by Kim Coghill and Alexander Smith)