September 4, 2019 / 11:52 AM / 2 months ago

China to cut bank reserve requirements in 'timely manner' to refuel slowing economy

BEIJING (Reuters) - China will implement both broad and targeted cuts in the reserve requirement ratio (RRR) for banks “in a timely manner,” China’s cabinet said in a meeting on Wednesday, an indication that a cut in the key ratio aimed at boosting lending could be imminent.

FILE PHOTO: Chinese Premier Li Keqiang speaks at the opening ceremony of World Economic Forum (WEF)'s Annual Meeting of New Champions 2019, or Summer Davos Forum, in Dalian, Liaoning province, China July 2, 2019. Liu Zhen/CNS via REUTERS

The People’s Bank of China (PBOC) has been widely expected by analysts to roll out more RRR cuts this year as the world’s second-largest economy sputters amid a trade war with the United States.

“At present, the external environment is becoming more complex and severe, and the downward pressure on the economy is increasing,” the State Council said at the meeting, which was chaired by Premier Li Keqiang, according to a statement on the government website.

“(We) will use both broad and targeted RRR cuts in a timely manner as tools to guide financial institutions to guide more funds into inclusive finance, and ramp up support for the real economy,” it said.

The reserve requirement ratio is the share of cash that banks must hold in reserve, and cutting it unleashes liquidity for lending. A “broad” cut applies to most or all lenders, while targeted cuts are applied to certain segments of the banking sector.

The last time the PBOC implemented a broad cut was in January, when the RRR was lowered by a total of 100 basis points in two stages, freeing up $116 billion for new lending.

“There is room for cutting RRR and it’s necessary to do so,” said Wen Bin, economist at Minsheng Bank. “China’s investment and consumption face downward pressure. It’s necessary to cut RRR for all banks to support the real economy.”

The PBOC has cut the RRR six times since early 2018, with Beijing urging cautious banks to keep lending to struggling businesses, especially smaller, private firms that account for over half of the country’s economic growth and most of its jobs.

The state council, or cabinet, also stressed the need to ensure the economy grows at a “reasonable range”, state broadcaster CCTV reported. China aims to achieve GDP growth of between 6% and 6.5% in 2019.

China will maintain a prudent monetary policy, and fine-tune the policy in a preemptive way, the cabinet meeting concluded.

Some bankers and analysts expect the PBOC to start cutting its key interest rates from this month, by lowering the rate on its medium-term lending facility (MLF), paving the way for cutting the new benchmark lending rate, the loan prime rate (LPR).

LOCAL BOND ISSUANCE

Beijing has also been trying to spur more infrastructure investment to support the economy. It has accelerated bond issuance in recent months in order to fill the full-year quota by the end of September, and eased some restrictions on special purpose bonds to allow greater leverage from banks.

The state council said on Wednesday China will allow local governments to issue special purpose bonds earlier than normal next year to help steady growth, and specified for the first time that about 20% of all special purpose bonds issued by every province could be used as project capital.

These bonds will be used to fund major infrastructure and energy projects, such as railway, parking lots, power grids, and natural gas pipeline networks, as well as social services, it said, adding that funds raised from these bonds will not be allowed to finance land reserve and real estate related projects.

The decision to advance the timing of the quota, which has previously been set in March, could enable regional governments to issue bonds to fund investment projects as early as January, financial magazine Caixin reported earlier on Wednesday.

Caixin reported that the finance ministry has ordered local governments to submit their 2020 bond demand earlier, but it would be “basically impossible” for the 2020 quota to be frontloaded for use this year, quoting an unnamed official at a provincial finance bureau.

The Ministry of Finance did not respond to Reuters’ faxed requests for comment.

Last year, China also moved to allow local governments to issue debt earlier than usual from January onwards, as the economy slowed and the trade war heated up.

ANZ Bank estimated the amount of pre-approved new special local government bonds quota for 2020 is likely to be about 0.8-1.3 trillion yuan.

But it noted China’s economic growth “will still likely test the threshold level of 6.0% or below in some quarters in 2020”.

Construction activity so far has been more modest than expected, raising expectations policymakers will need to roll out additional growth boosting measures.

Infrastructure investment rose 3.8% in the first seven months from a year earlier, slowing from 4.1% in the first half despite massive local bond issuance.

China’s local governments issued a net 1.69 trillion yuan ($238.5 billion) in special bonds in the first seven months of the year, the finance ministry said on Thursday, accounting for 78.4% of the annual quota.

Reporting by Cheng Leng, Yawen Chen, Tony Munroe, and Kevin Yao; editing by Louise Heavens, Darren Schuettler and Toby Chopra

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