China is cutting the amount of reserves the country’s banks are required to keep on deposit at the central bank, freeing up more than $100bn to help cushion a slowing economy and the impact of a potential trade war with the US.
The People’s Bank of China announced in a statement on Sunday that it would reduce the reserve requirement ratio for large commercial banks by half a percentage point, giving them an additional Rmb500bn ($77bn) to deploy. Reserve cuts for smaller banks are expected to free up an additional Rmb200bn.
While China’s central bank did not mention the looming trade war with the country’s largest trading partner, the cuts are scheduled to take effect on July 5.
This month, US President Donald Trump announced that his administration would impose punitive tariffs on $34bn worth of Chinese industrial exports in retaliation for alleged intellectual property theft. The first round of tariffs are scheduled to take effect on July 6, with a second round hitting another $16bn worth of Chinese exports later in the summer.
The Chinese government has promised to respond in kind, penalising an equivalent value of US exports as soon as Mr Trump’s tariffs take effect.
The US administration is also taking further steps to escalate a trade war with plans to restrict Chinese investment in US companies and start-ups in sectors ranging from aerospace to robotics to railways.
Last week Xi Jinping, China’s president, told a group of global executives, including the heads of US companies such as Goldman Sachs and Cargill, that his country could not “turn the other cheek” in the face of such threats and would hit back.
According to three people briefed on the June 21 meeting, Mr Xi also told the visiting executives that “when one door closes, another opens” — a reference to the opportunities that could open up for non-US companies if Mr Trump does not back down from his tariff threat.
The PBoC, which has been spearheading a campaign against financial risk over the past two years, emphasised that the reserve cuts would be carefully “targeted”. The campaign against financial risk is being executed by Liu He, the vice-premier who oversees the country’s financial regulators and also leads trade negotiations with the US and EU.
Big banks will be required to direct the Rmb500bn in freed-up funds towards “debt-for-equity” swaps — a recently introduced programme in which banks write off debt to heavily indebted firms in return for equity stakes. While the programme has largely benefited heavily indebted state-owned industrial firms, the PBoC emphasised that the new funds should not be used to help “zombie” companies with no hope of recovery.
The Rmb200bn in funds freed up for smaller banks is supposed to be used to boost funding for small and medium-sized enterprises, which have long struggled to secure credit that tends to flow to state-sector companies. Mr Liu and his aides are determined to stamp out “speculative” financial practices and make sure that liquidity instead flows into the “real economy”.
The current reserve requirement ratios for large and small banks are set at 16 and 14 per cent respectively.
“Today’s cut will [provide] fresh liquidity for the real economy, so it sends a strong signal of policy easing on the part of the State Council and PBoC,” Lu Ting, chief China economist at Nomura, wrote in a research note. “Despite today’s cut . . . the Chinese economy is yet to bottom out and the situation could get worse before getting better.”
Last week China’s stock markets fell to two-year lows and the carefully managed renminbi declined 1 per cent against the US dollar as Mr Trump escalated his tariff threats and a host of economic indicators indicated that Mr Liu’s financial crackdown had slowed growth in May.
