China slashes banks' reserve requirements again as economy slows

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The People's Bank of China (PBOC) has changed the definition of a small business, meaning an enterprise with a credit line of less than 10 million yuan (US$1.46 million) will qualify for targeted reserve-requirement ratio cuts, up from the previous standard of 5 million yuan.

The cut in banks' reserve requirement ratios is the fifth such move over the past year as the economy also faces mounting pressure from USA tariffs.

It will reduce the required reserve ratio (RRR) by 0.5 of a percentage point on January 15 and again on January 25 so that banks have sufficient funds to lend, especially to private firms and small businesses.

China is taking new steps to encourage bank lending and stimulate the country's flagging economy. Lowering the ratio is expected to boost lending.

China cut the amount of cash banks need to set aside as reserves four times a year ago as the nation struggled with slower economic growth, record corporate bond defaults and a trade war with the US.

"The old playbook of China's economy seems to be back", said Shao Yu, chief economist at Orient Securities in Shanghai. One big wild card is how the trade war between the United States and China will play out in 2019.

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PBOC's targeted liquidity support to certain institutions for special objective use - such as providing long-term cheap funds to the China Development Bank to finance subsidised housing - has edged towards bankrolling projects favoured by the government.

Analysts at JPMorgan Chase said that the central bank's action suggests that "the Chinese government is tilting toward a growth-oriented stance".

A further deceleration is seen this year, with some analysts forecasting growth will cool to almost 6 percent, which would mark China's weakest expansion since 1990.

In addition to monetary policy easing, last week China allocated its local government debt quota "ahead of schedule" to accelerate infrastructure spending.

The government maintains last year's economic growth will be on target at around 6.5 per cent, slowing from 6.9 per cent in 2017.

In the same survey, an index that indicated bank loan demand in small and micro-enterprises increased to 67.9 in the fourth quarter, up from 67.1 in the third quarter, and it is also higher than the indices for medium-sized and large companies, reflecting small-scale businesses' stronger desire to obtain credit.

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