China's central bank to pump US$210 billion into ailing economy

SL_Premier Li

The People's Bank of China (PBOC) has changed the definition of a small business, meaning an enterprise with a credit line of less than 10 million yuan (US$1.46 million) will qualify for targeted reserve-requirement ratio cuts, up from the previous standard of 5 million yuan.

The policy move was announced hours after Chinese Premier Li Keqiang told the central bank to make universal cuts of the ratio as part of Beijing's efforts to bolster economic growth having cut the RRR four times past year.

"The economy is weak and stimulus needs to arrive quickly", economists at ING said in a note earlier this week. The size of the move was on the upper end of market expectations, and the net funds released would be the largest amount in the five cuts since last January.

Consumption will remain the main driver of China's economy, as weaker credit growth weighs on investment and slowing global demand and higher U.S. duties on Chinese good take a toll on the country's exports, the report said.

RRRs - now 14.5 percent for large institutions and 12.5 percent for smaller banks - will be lowered by a total of 100 basis points in two stages, the PBOC said.

The cuts will be effective January 15 and January 25, and come ahead of the long Lunar New Year celebrations when cash conditions often get tight.

China reported on Monday that factory activity shrank in December for the first time in over two years.

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It was the first policy move after the State Council, the country's cabinet, said last month that China would improve its policies on targeted reserve ratio cuts to better support the private sector as well as small businesses.

The key for the financial sector to serve the real economy is to cope with the need of keeping economic growth within a reasonable range and stabilizing employment, Li said.

The central bank said on Friday, after a work meeting, that it would keep liquidity reasonably ample, and market interest rates steady.

In addition to the central bank's numerous support measures, the government has also ramped up spending on infrastructure to rekindle sluggish demand and investment, but the moves will take some time to kick in.

The government maintains last year's economic growth will be on target at around 6.5 per cent, slowing from 6.9 per cent in 2017.

The USD/CNH currency pair is expected to trade towards 6.60-6.70 as the US and China are increasingly likely to reach a trade deal by the March 1 deadline, according to the latest research report from Scotiabank.

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