China’s central bank cuts RRR by 1 percentage point

Policymakers set tone for prudent monetary policy

China’s central bank announced on Friday that it will cut banks’ reserve ratio by 1 percentage point to boost the economy while keeping monetary policy prudent in 2019.

The People’s Bank of China (PBC) said the changes in reserve requirement ratio (RRR) will take effect on Tuesday and January 25, cut by 0.5 percentage point each time, according to a statement on its website. The cut aims to replace medium lending facility (MLF) maturing in the first quarter of 2019.

The latest move will unleash 1.5 trillion yuan ($218.4 billion) in liquidity. The central bank said it would continue to maintain prudent monetary policy with targeted measures.

The measure is not a floodwaterstyle stimulus, but is a targeted adjustment. Implementing the policy in two steps is in line with the pace of injecting liquidity between the upcoming Spring Festival, keeping the exchange rate of Chinese yuan stable.

“The latest RRR cut is in line with the country’s Central Economic Work Conference (CEWC) in December, which urged a “neutral to loose” monetary policy to stimulate growth,” Liu Xuezhi, senior analyst of Bank of Communications, told the Global Times on Friday.

As the Chinese Lunar New Year approaches, policymakers are stepping up efforts to meet growing demand for cash flow and boost consumption, and by adopting the cut in steps it will avoid excess liquidity which may drive up leverage, he noted.

Chinese Premier Li Keqiang visited Bank of China, ICBC and China Construction Bank on Friday, emphasizing that banks should impose more countercyclical adjustments and “make good use of” across-the-board RRR cuts as well as targeted cuts, according to a state- ment published on the website of the central government.

The central government has set the tone for economic growth in 2019 by carrying out counter-cyclical adjustments and deepening reforms, with a prudent monetary policy and proactive fiscal policy, according to the CEWC held in December.

In line with the CEWC, the PBC will carry out prudent monetary policy by increasing the number of fine-tuning, said Dong Ximiao, senior researcher at the Chongyang Institute for Financial Studies at Renmin University of China.

“We expect there will be two or three RRR cuts within this year, with slightly loose liquidity policy,” he said.

The latest move is the first RRR cut at the beginning of 2019, following several targeted cuts in 2018.

“It also indicates the orientation for the rest of year, and the overall monetary policy will be prudent and slightly loose,” Liu said.