BEIJING: China’s central bank said on Wednesday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan ($114.91bn) in liquidity to shore up the slowing economy.

The People’s Bank of China (PBOC) said on its website it will cut banks’ reserve requirement ratio (RRR) by 50 basis points, effective Jan 6. The move would bring the level for big banks down to 12.5 per cent.

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 the weakest pace in nearly 30 years.

Many investors had expected Beijing to announce more support measures soon. While recent data has shown signs of improvement, and Beijing and Washington have agreed to de-escalate their long trade war, analysts are unsure if either will be sustainable.

Premier Li Keqiang raised expectations of an imminent cut in a speech in late December, saying 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 could also ease 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 strains on China’s financial system.

The PBOC 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 120bn yuan, the central bank said, stressing that it should be used to fund small, local businesses.

Analysts at Nomura had forecast the PBOC would deliver a system-wide 50bps cut in the RRR before the holidays, together with an added reduction for some smaller banks. Analysts say the US-China Phase one trade deal will relieve only some of the pressure weighing on the Chinese economy.

Published in Dawn, January 2nd, 2020