As the trade war looms, China reduces the reserve requirements of some banks to increase loans

BEIJING (Reuters) – China's central bank said on Sunday it would reduce the amount of cash some banks must keep as reserves by 50 basis points (bp), releasing $ 108 billion in liquidity, to accelerate the pace of Debt. -capital exchanges and stimulate loans to smaller companies.

PHOTO OF THE ARCHIVE: A woman pbades in front of the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, China, on June 21, 2013. REUTERS / Jason Lee / Stock Photo

The reduction of the reserve, the third by the central bank this year, had been widely anticipated by investors amid concerns about the liquidity of the market and a possible economic ballast of a trade dispute with the United States.

But the 700 billion yuan ($ 107.65 billion) in liquidity that, according to the central bank, will result from the reduction of reserves, were greater than expected.

Expectations of a cut increased after the State Council or the cabinet reported on Wednesday that monetary policy tools will be implemented that will include selective cuts in bank reserve ratios to strengthen credit flows to small businesses and maintain Economic growth in a reasonable range.

Economists do not rule out further reductions in reserve requirements for the rest of the year as borrowing costs rise due to Beijing's crackdown on leverage in the financial system, a campaign now in its third year, while the Uncertainty about Sino-US trade ties persist

The People's Bank of China (PBOC) said on Sunday that the latest selective slashing reserve reserve ratios (RRR) of some banks-currently 16 percent for large banks and 14 percent for smaller banks – will enter into force on July 5.

The People's Bank of China said that the cut will release some 500 billion yuan (77 billion dollars) for the five large state banks and 12 commercial national stock banks. Lenders are encouraged to use the money to make debt-for-equity swaps.

China's politicians have been pushing for debt-for-equity swaps since late 2016 to relieve pressure on companies struggling with their debts.

The country's main banks, controlled by the government, have rushed to sign agreements with state companies to ease the burden of their debt and give them time to change their businesses and improve their creditworthiness.

The latest RRR cuts will also release around 200 billion yuan in funds for medium and small banks to increase loans to small businesses with credit problems, the People's Bank of China said.

The combined liquidity injection of 700 billion yuan exceeded market expectations of 400 billion yuan. In the last specific RRR cut of the BPC in April, 400 billion yuan of net liquidity was released.

"The intensity of the movement exceeded market expectations," said Wang Jun, chief economist at Beijing-based Zhongyuan Bank.

"This measure will help support the real economy and stabilize financial markets, we have seen an increase in debt defaults and financing bonds in small businesses, as well as a strong adjustment in the capital market."

But the latest reduction in reserves indicates a "policy adjustment," not a policy reversal, Wang said.

The central bank said on Sunday that it will keep the monetary policy prudent and neutral.

Sunday's announcement followed the worst weekly loss on the Chinese stock market since the beginning of February, as fears of a full-blown trade war with the United States weighed.

The Chinese yuan CNY = CFXS on Friday also fell to its lowest level against the dollar in more than five months, although it has remained firm .CFSCNYI against a basket of currencies of trading partners, and a sharp depreciation not It's in the cards.


The latest reduction in RRR is expected to take effect one day before the United States and China are expected to start charging higher rates on the respective product lists.

Fears of a full-scale trade war with Washington have raised concerns about the outlook for the world's second largest economy, following China's weaker-than-expected growth data for May and while financial regulatory repression Beijing begins to weigh on the business activity.

Net exports in general were already a drag on growth in the first quarter after giving an additional boost to the Chinese economy last year, highlighting the need for a sustained strength in domestic demand if new US tariffs are imposed significant

Beijing is likely to back down on efforts to reduce its debt dependence if the dispute turns into a full-scale trade war, some economists say.

Beijing's financial risk reduction has already raised borrowing costs slowly, and is restricting alternative and darker financing sources for companies such as parallel banking.

Tight liquidity conditions have caused an increasing number of credit default with private companies that face increasing refinancing risks. The latest official surveys also showed that tight financing has affected smaller manufacturers.

The weighted average credit rate for non-financial companies, a key indicator that reflects corporate financing costs, rose 22 basis points in the first quarter to 5.96 percent, data from the People's Bank of China showed. That compares with a total of 47 basis points in 2017.

Policymakers have been trying to strike a delicate balance between the need for more stringent oversight and reforms and ensure the stability of the financial system, while maintaining growth economic in the good way.

ANZ Research said on Sunday that it is still waiting for another RRB cut of 50 bps in October.

Economists still expect China's economic growth to fall to 6.5 percent this year from 6.9 percent in 2017, citing higher borrowing costs, stricter limits on industrial pollution and continued repression of spending of local governments to keep their debt levels under control.

($ 1 = 6.5027 Chinese renminbi yuan)

Additional reports by Norihiko Shirouzu and Ryan Woo; Edition by Toby Chopra and David Evans


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