China cut its reserve ratio again to pump cash into the faltering economy

Photo: China Photos/Getty Images

After another horror day on the Chinese stock market yesterday China’s central bank, the PBOC, has moved to again buttress the economic outlook by cutting the amount of money banks need to hold as reserves by 0.5%.

This move, announced during the European trading session, takes the reserve ratio requirement, RRR, down to 17%. The PBOC has taken the move in the hope that the banks will lend this extra cash in the economy to bolster economic activity.

Jason Wong, currency strategist at BNZ in Wellington, said the move “is seen more as symbolic, as PBoC monetary injections have already reduced interbank rates, in an attempt to offset the impact of capital outflows”.

But the cut, and specifically its timing, was a surprise coming on the first trading day after the close of the G20 finance minister and central bankers meeting in Shanghai over the weekend.

No doubt there will be questions on whether this was a panic move after the Shanghai composite hit its lowest levels for the year before recovering to finish down 2.89%.

But the PBOC has been nudging the Chinese yuan weaker over the past few days. And the cut comes after the Central Bank governor again reiterated that monetary policy in China has an easing bias.

Taken together, that suggests this move is part of a co-ordinated policy by the PBOC to ease liquidity within the Chinese economy and banking system.

Coming so soon after the G20, it also implies that the other members are aware of China’s plans.

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