China slashes banks' reserve requirements again as economy slows

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China is set to reduce cut banks' reserve requirement ratios (RRRs) amid slower economic growth.

By allowing banks to place a smaller reserve at the PBOC, the central bank has shelved "general" monetary policy tools including benchmark interest rate cuts and broad-based adjustment in the required reserve ratio - the minimum percentage of deposits a bank is required to have with the PBOC.

It was the first policy move after the State Council, the country's cabinet, said last month that China would improve its policies on targeted reserve ratio cuts to better support the private sector as well as small businesses.

At the same time, the central bank's move is still seen a good news for lenders and the broad economy as liquidity is tightening before the Lunar New Year holiday. China International Capital Corp said that may release as much as 400 billion yuan of liquidity.

According to numbers China released earlier this week, factory activity declined in December for the first time in more than two years, suggesting that the business environment is likely to become worse.

"Policy easing will be stepped up further over coming months", Capital Economics said in a research note.

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The Fed's tightening cycle includes both rate hikes and the gradual shedding of its more than $4 trillion in assets. Data released earlier on Friday showed US employers added the most workers in 10 months as wage gains accelerated.

The reduction is being made in two equal stages, effective January 15 and January 25, the PBOC said.

Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed the economy was continuing to lose steam amid increased signs of a pinch from the trade war with the United States.

China and the United States will hold vice ministerial level trade talks in Beijing on January 7-8, as they seek to end a dispute that is inflicting increasing pain on both economies and roiling global financial markets.

The cut in RRR is the first in 2019 by the People's Bank of China (PBOC). Implementing the cut in two phases ensures "overall banking liquidity stays reasonable and sufficient while balancing internal and external factors to keep the yuan's exchange rate at a reasonable and equilibrium level", it said. The government has also ramped up spending on infrastructure to rekindle sluggish demand and investment. "The central bank has been handing liquidity to the banks, but the banks are unwilling to lend".

In December 2018, World Bank said China's economic growth is likely to slow to 6.2% in 2019 from an expected 6.5 percent this year.

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