China took more action Friday to boost its economy, reducing the amount of cash banks have to keep in reserve.
The People’s Bank of China said it would slash the reserve requirement ratio for most financial institutions by 50 basis points. It’s the first cut in the ratio in eight months and the move, which takes effect over the next three months, could unleash 900 billion yuan ($126 billion) for long-term lending, the central bank said.
China’s economic growth slumped to its lowest level in nearly three decades in the second quarter. Industrial production, an important indicator for the country’s economy, also posted its worst growth in 17 years. The world’s second biggest economy is grappling with fallout from the trade war with the United States, as well as domestic challenges as it tries to rely less on debt to fuel growth.
“By releasing 900 billion yuan, the cuts will effectively increase the sources of funds for financial institutions to support the economy. It will also reduce banks’ cost of funds by 15 billion yuan annually, which subsequently lowers the real lending rates for borrowers,” the central bank said in a statement.
It is trying to head off a seasonal squeeze in lending that usually coincides with the tax filing season around the middle of September.
“The direction of the prudent monetary policy hasn’t changed,” the PBOC added.
The PBOC has cut the reserve requirement ratio seven times since early 2018, according to Reuters. Nevertheless, analysts expect increasing economic pressure will prompt the central bank to take it even lower.
“Given that the headwinds to China’s economy from weaker external demand and cooling property construction are likely to intensify in the coming months, we doubt the PBOC will stop at just one RRR cut,” wrote Julian Evans-Pritchard, senior China economist for Capital Economics.
That still may not be enough to prevent a further slowdown in growth, let alone a strong rebound, he added.
Last month, the central bank launched a long-awaited reform to the way it manages money to support growth and employment. Its aim is to make it cheaper and easier for companies to borrow.
The central bank is gradually replacing its existing fixed benchmark lending rate, with a new Loan Prime Rate. The LPR, which will become the new benchmark for banks to price loans, is supposed to better reflect changes in market rates.