China’s Covid-Hit Economy Gets A Stimulus Increase From Its Central Bank

For the second time this year, China’s central bank reduced the amount of cash that lenders must keep in reserve, providing more support to an economy that is being battered by an increase of Covid cases and a persistent property slowdown. According to a statement released on Friday, the People’s Bank of China decreased the reserve requirement ratio for the majority of banks by 25 basis points. The adjustment will add 500 billion yuan ($70 billion) in liquidity to the economy when it goes into effect on December 5.

The decrease is intended to “maintain liquidity reasonably adequate” and “increase the assistance for the actual economy,” as well as to enable banks in assisting sectors hit hard by the Covid epidemic.

The State Council, China’s cabinet, asked for greater steps to strengthen the economic recovery earlier this week, hinting to the RRR cut, the first since April. Additionally, the central bank has reduced its benchmark interest rates twice this year; the most recent change was made in August.

The PBOC’s action follows considerable government interventions in the economy in recent months, including a rescue package for the real estate industry and an adjustment to some Covid limitations to lessen the economy’s harm.

The prospect for growth is still difficult, though. While Covid cases have risen to a record level and forced major cities like Beijing to restrict resident migration, a recovery in the housing market is likely to be gradual.

Nomura Holdings Inc. last week reduced its projection for 2023 economic growth to 4%, according to economists, who predict that China will likely experience a protracted and difficult process of trying to reopen the country. “It won’t be easy going for the economy with Covid flareups expanding, demanding new activity limitations, and limiting global growth. Given that scenario, we anticipate the PBOC to continue its policy of gradual easing through 2023. In the coming year, we predict that the PBOC will cut the RRR by an additional 50 bps. It may also reduce the key policy interest rate for its one-year medium-term lending facility by 20 basis points. We predict it will do so in two steps, with the initial 10-bp reduction occurring in 1Q23.
The policy relaxation stands in stark contrast to the interest rate increases this year by the US Federal Reserve and other significant central banks to tackle skyrocketing inflation. Officials from the Fed recently made it clear they can scale back future aggressive interest rate hikes, providing some relief for the yuan following its steep devaluation.

By releasing affordable long-term liquidity for banks, the RRR enables them to offer more loans to individuals and companies. For financial institutions qualified to receive a discount, it will result in annual funding cost savings of 5.6 billion yuan, according to PBOC.

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According to Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle Inc., the action will “moderately cut the funding costs for commercial lenders and boost credit extension, so as to bring down the borrowing costs by enterprises and consumers.”

According to Ming Ming, chief economist at Citic Securities Co., the greater liquidity for banks will aid in lowering their liability costs, which might encourage them to lower the five-year loan prime rate, a benchmark for mortgage rates.

Although greater support from the PBOC was anticipated by economists, the timing came as a surprise considering the central bank’s previous circumspect pronouncements alerting to potential inflation dangers as a result of covid. The PBOC reinstated a clause to deploy “quantitative and structural” functions of monetary policy tools that it had removed in a report released earlier this month in Friday’s announcement.

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