People’s Bank of China Slashes Banks’ Reserve Requirement to 18.5% from 19.5%

April 20, 2015

Sunday’s announcement was double the size of this year’s initial reduction of the reserve requirement ratio in February.  February’s 50-bp cut — the more typical magnitude of changes — had been the first cut since and easing in May 2012 capped off a flurry of three cuts in the space of a half-year.  The backdrop to the latest modification, which will free up 1.2 trillion yuan of liquidity, was last week’s Chinese data releases showing

  • On-year declines of 15.0% and 12.7% in exports and imports.
  • 7.0% GDP growth in the first quarter, down from 7.4% in 2014 and the lowest pace since 2009.
  • Slower growth in industrial production and retail sales of 5.6% and 10.2% in the year to March.
  • Fixed asset investment growth of 13.5% in the first quarter, down from 15.7% in 2014.
  • Slower-than-expected growth in the M1 and M2 money aggregates.

Also, on-year consumer price and producer price changes last quarter amounted to only 1.2% and -4.6%, and net capital inflows have diminished greatly.  While the 100-basis point reserve ratio cut was matched in size before just once, that being in 2008, the question remains whether monetary policy has been loosened sufficiently to enable China to meet the government’s 2015 growth target of 7.0%.  The latest IMF World Economic Outlook projects Chinese GDP expansion at 6.8% this year followed by an even lower 6.3% in 2016, and the average forecast in The Economist April survey of private sector forecasters predicts Chinese growth in those years of 6.9% and then 6.7%.  Measures announced just before the weekend will make it more costly to invest in Chinese equities, and the yuan has been stickier against a rising dollar than most other currencies. 

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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