With the Chinese economy beginning the new year on a decidedly downbeat note, Beijing’s leaders are injecting more than $200 billion into its financial system to ease lending.
The People’s Bank of China on Friday said it would cut the amount of cash that banks must hold as reserves by 1 percentage point. The move will essentially free up 1.5 trillion Chinese renminbi (about US$218 billion), for an economy experiencing weaker factory output and consumer confidence while it weathers a trade war with the United States.
The cut is not unusual for China’s central bank, but it comes amid uncertainty about how Beijing will manage slower growth. China’s slowdown has contributed to shaky global financial markets and could pinch the world’s growth. On Wednesday, underscoring the broad impact, Apple unexpectedly cut its sales forecast for its latest quarter, citing disappointing iPhone sales in China, once one of its most vibrant markets.
Chinese officials last month pledged to step up support of the economy, and they are facing new urgency, said Mark Williams, chief Asia economist for Capital Economics, a research firm. Retail and auto sales are down, and China’s latest manufacturing data showed that factory activity in China shrank in December. While monthly data released Friday showed improvement in China’s services sector, the overall picture has become more concerning.
“The consistently downbeat tone of the data released since then will only have underlined the strains the economy is facing,” Williams said.
This month, China will report economic growth figures for the last three months of 2018. While China’s headline growth figure is widely seen as unreliable, it dipped in the third quarter to 6.5 percent, marking the lowest level since the aftermath of the global financial crisis.
The move by the central bank Friday appeared to be part of a coordinated effort to cheer the economy along. Earlier Friday, Li Keqiang, the country’s premier, said China would move to shore up the economy through measures that included cutting bank reserve requirement ratios and lowering taxes.
The central bank said it would cut its reserve requirement ratio – a measure of how much cash from deposits that lenders need to keep – by half a percentage point Jan. 15 and another half a percentage point by Jan. 25.
The move will give banks more leeway to lend money, though analysts noted the net amount of money flowing into the system would be roughly half the $218 billion headline figure, as the central bank shuts off other sources of funds. It also comes roughly a month before China’s Lunar New Year holiday, when Chinese households sometimes strain the monetary system by spending more and by giving cash as gifts.
China has traditionally used its state-controlled banking system to flood the economy with money when growth slows. Last year, China cut the reserve ratio four times. But economists, small businesses and many others say the mechanism shovels money into big, inefficient companies or into investment bubbles instead of toward the smaller entrepreneurs who need it more.
The cut “will be good for curbing the economic downturn and solving the financing difficulties of enterprises,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences.
“But this is just one policy,” Yu added, saying it risks pouring money into real estate and the stock market, which would do little to solve the economy’s problems. “We need a lot of other policies to cooperate.”
For several weeks, economists and analysts have speculated that officials could move to push a hefty stimulus package that would give the flagging economy a shot in the arm. But such bold moves have become increasingly difficult for the Chinese government, which is still contending with a huge debt load accumulated over the past decade to spur growth.
Still, many analysts took the move as a sign that China’s leaders would be proactive in heading off any worsening slump.
“The central bank has made it clear that this wasn’t ‘releasing the floodwaters’ by providing a huge stimulus comparable to that introduced in 2009, but it is clear that they are redoubling efforts to stabilize the economy and the currency,” Geoffrey Yu, the head of the British investment office of the Swiss Bank UBS, said in an email.
“This swift action supports our view that there won’t be a sharp deceleration in the Chinese economy this year and that fears of a major global slowdown are overdone,” Yu added.