China to Cut Reserve Requirement Ratio by 100 Basis Points

China to Cut Reserve Requirement Ratio by 100 Basis Points

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.

"The old playbook of China's economy seems to be back", said Shao Yu, chief economist at Orient Securities in Shanghai.

According to a survey released by the PBOC on Christmas Eve, in the fourth quarter 81.2pc of the participants from the banking sector said the current monetary policy is "appropriate", 4.1 percentage points higher than in the third quarter.

The central bank said China's economic growth is still within a reasonable range and it will continue to implement a prudent monetary policy, without engaging in massive stimulus. Lowering the ratio is expected to boost lending.

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

"With credit growth still slowing and, typically, a six-month lag before any turnaround in credit affects the economy, worries about the outlook for China will persist for several months yet".

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The size of the cut was at the upper end of market expectations, and the net funds released would be the largest amount in the five cuts since last January. It is the first cut since October last year and the fifth in a year.

Bank lending, money supply and - in a broader context - total social financing will maintain a proper growth pace to cope with GDP growth, they suggested.

This will allow banks to lend more capital to enterprises now classed as small businesses, and therefore free up more reserves from the central bank, with estimates ranging from 400 billion yuan to as much as 700 billion yuan.

Cutting benchmark interest rates may be a last resort as that could weigh on the yuan CNY=CFXS and fuel debt risks, analysts say.

Together, the new measures should inject about 800 billion yuan ($116 billion) into the world's second largest economy as growth slows and a trade war with the United States takes its toll. The government has also ramped up spending on infrastructure to rekindle sluggish demand and investment.

The effectiveness of a move by China's central bank to inject up to an expected 700 billion yuan into the world's second largest but worryingly slowing economy is hard to calculate given the lack of transparency in the monetary policy, warned a chief economist.

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