News & Reports News Year 2012 May , 2012 Bank reserve ratio cut set to provide boost to economy

Bank reserve ratio cut set to provide boost to economy


CHINA yesterday announced a long-awaited move to make more money available for lending to address the slowing economic growth in China.

The People's Bank of China said it will cut the reserve requirement ratio for commercial banks for 0.5 percentage point effective from Friday, the third cut since last December.

The announcement came a day after data showed cooler inflation, sluggish trading, slower growth of domestic consumption, and disappointing banks lending in April.

Large banks will have to hand in 20 percent of their deposits to the central bank as reserve after May 18, down from 20.5 percent currently. The ratio will be 16.5 percent for small banks.

The move is expected to free around 420 billion yuan (US$66.7 billion) for lending.

"The cut in the reserve requirement alone is not enough to stabilize the economy," said Qu Hongbin, a chief economist with HSBC Bank. "China's economy is facing heavy slowdown pressure."

He estimated that the growth of gross domestic product may soften from first quarter's 8.1 percent to 7 percent in April.

"The country should carry out more tax cutting policies, increase investment in affordable housing and medical care," Qu added.

Lian Ping, an economist with the Agricultural Bank of China, said that the move will lower companies' fund-raising costs by increasing the money supply, and will also help to activate the bond and stock markets.

The additional liquidity can also offset a slower inflow of foreign capital amid global economic uncertainties. Central bank data showed that the volume of yuan banks have used to purchase foreign currencies in the first quarter was 74 percent lower than the same period last year.

Expectations have been mounting for the cut since March when central bank governor Zhou Xiaochuan said that China has "plenty room" for lowering the reserve requirement ratio.

Economists have advised for looser monetary policies and more stimulus plans after China's top statistic bureau said that the Consumer Price Index expanded 3.4 percent in April from a year earlier, down from a rise of 3.6 percent in March.

Meanwhile, China's industrial production gained 9.3 percent last month, less than the rise of 11.9 percent in March, and was the slowest since 2009. Retail sales growth moderated to 14.1 percent from 15.2 percent, and fixed-asset investment in the first four months advanced 20.2 percent, compared with 20.9 percent in the first quarter.

Analysts have estimated that two or three more cuts in reserve requirements may come this year.

Last Updated (Sunday, 13 May 2012 09:44)