China Cuts the Reserve Ratios of Banks Again, Freeing up $115 Billion to Spur the Economy

China’s Central Bank recently confirmed to cut the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds in order to shore up the slowing economy. The People’s Bank of China (PBOC) stated on its website that it will cut the reserve requirement ratio on banks (RRR) by 50 basis points, effective from January 6th.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to its weakest pace in nearly 30 years.

Many investors had expected Beijing to announce more support measures as recent data has shown signs of improvement and considering that Beijing and Washington have agreed to de-escalate their long trade war, analysts are still unsure if either will prove sustainable, forecast growth is also expected to further cool this year.

The RRR cut will help boost investor confidence and support the economy, which is gradually steadying. At the same time, another cut in China’s new loan prime rate (LPR) could be on the horizon.

Premier Li Keqiang raised expectations of an imminent RRR cut in a speech in late December, declaring that authorities were considering more measures to lower financing costs for smaller companies, including broad-based and “targeted” RRR reductions aimed at helping more vulnerable parts of the economy.

Freeing up more liquidity now would also reduce the risks of a credit crunch ahead of the long Lunar New Year holidays later this month, when demand for cash surges. Record debt defaults and problems at some smaller banks have already added to the strains on China’s financial system. The PBOC has said it expects total liquidity in the banking system to remain stable ahead of the Lunar New Year.

Of the latest funds released, small and medium banks would receive roughly 120 billion yuan, the central bank said, stressing that it should be used to fund small, local businesses. The PBOC have stated that lower reserve requirements will reduce the annual funding costs of banks by 15 billion yuan, which could reduce pressure on their profit margins from recent interest rate reforms. Last week, the PBOC also outlined that existing floating-rate loans will be switched to the new benchmark rate starting from January 1 as part of a broader effort to lower financing costs.

Analysts at Nomura had forecast the PBOC would deliver a system-wide 50 bps cut in the RRR before the holidays, together with an added reduction for some smaller banks. Analysts also say the U.S-China phase one trade deal, expected to be signed this month, will relieve only some of the pressure weighing on the Chinese economy, which has also been weighed down by sluggish domestic and global demand, slowing investment and weakening business confidence.

China plans to set a lower economic growth target of around 6% in 2020, relying on increased state infrastructure spending to ward off a sharper slowdown. Growth has cooled from 6.8% in 2017 to 6% in the third quarter of 2019, the slowest since the early 1990s.