China is releasing $ 154 billion from banks to boost economic recovery by Reuters

By Stella Qiu and Kevin Yao

BEIJING (Reuters) – China will cut the amount of money banks need to hold in reserve, releasing about one trillion yuan ($ 154.19 billion) in long-term liquidity to bolster the post-COVID economic recovery that has begun to lose its long-term liquidity strength.

The People’s Bank of China (PBOC) said on its website that the ratio of reserve requirements (RRR) for all banks would be reduced by 50 basis points (bps) from 15 July.

The world’s second-largest economy has once again reached pre-pandemic growth levels, driven by a surprisingly resilient export sector. But growth is losing momentum and small businesses are suffering a recent sharp rise in commodity prices.

Many analysts believe that accumulated COVID demand has peaked and growth rates will begin to moderate in the second half of the year as exports weaken, rising producer price inflation and Beijing’s crackdown on the real estate market.

“More than a signal that more money is coming, I think it’s a finer adjustment,” said Elwin de Groot, head of macro-strategy at Rabobank.

“It was already stated in part because we saw some tightening in the Chinese money markets, and it’s basically to alleviate those pressures.”

HELP RETURN LOANS

The PBOC said its prudent monetary policy had not changed. Part of the released liquidity will help financial institutions repay medium-term loan (MLF) loans, and will also help ease the liquidity pressure caused by tax payments.

The central bank said the weighted average RRR of Chinese financial institutions will fall to 8.9% after the reduction.

Banks that suffer a 5% RRR will be exempt from the new cut.

The PBOC cut its last RRR in April last year, when the Chinese economy was still severely affected by the coronavirus crisis. As the economy bounced back sharply, the PBOC shifted moderately.

The Chinese cabinet on Wednesday said authorities would use one-time reductions in RRR to address the negative impact of rising commodity prices on small businesses, the market said in a statement.

China’s May plant prices rose at the fastest pace in the year in June for more than 12 years as commodity prices rose. Along with supply chain problems, including a global shortage of semiconductors, industrial production has slowed in the third consecutive month of May.

Underlying demand remains weak in China. Consumer inflation, which eased in June, was still far from the government’s target of around 3%.

This year the economy is expected to grow by more than 8%, which the government opposes to modest growth of more than 6%, which suggests that it is not taking much of a step back.

A former PBOC official said earlier in the week that Beijing should have lower market interest rates to support economic growth and ease pressures from local government funding.

($ 1 = 6,484 renminbi)