China cuts banks' reserve ratio to support growth

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The required reserve ratio for banks will drop by 0.5 percentage point on January 15 and a further 0.5 percentage point on January 25, the People's Bank of China said on its website.

The reserve requirement ratio refers to the percentage of cash that financial institutions are required to place in the central bank as reserves, against the amount of deposits they hold.

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 previous year.

Li said the government will stick to the basic tone of seeking progress while maintaining stability, maintain the consistency and stability of the macro policy and enhance counter-cyclical adjustments.

Economists believe the government could take more fiscal steps by cutting taxes and boosting spending on infrastructure, amid expectations that the budget deficit ratio could be lifted to 3 percent in 2019 from 2.6 percent past year.

Together, the new measures should inject about 800 billion yuan ($116 billion) into the world's second largest economy as growth slows and a trade war with the United States takes its toll.

"Increasing investment on infrastructures such as railways, motorways and airports will also be conducted".

China predicts a GDP growth of 6.5% in 2018, compared with 6.9% in 2017.

The twisted and conditional liquidity support is part of the central bank's controversial plan to implement "targeted easing" which is aimed at ensuring funds will end up in hands of the right borrowers such as small factory owners.

China slashed reserve requirements four times last year to free up more funds for banks to lend and analysts expect three to four more cuts this year.

He made the comments at a meeting with officials of the country's banking and insurance regulator after visiting Bank of China, Industrial and Commercial Bank of China and China Construction Bank.

Wen Bin, an economist at China Minsheng Banking, said that the central bank needed to cut the RRR continuously to provide liquidity to the economy at a time when China's trade surplus and capital inflows, the traditional sources of domestic liquidity, were in danger of drying up.

"The Chinese economy continues healthy development and stays within a reasonable range", it said.

China's manufacturing purchasing managers index fell into the contraction territory last month, the weakest since early 2016.

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