SYDNEY: China’s central bank governor, Zhou Xiaochuan, recently said that we shouldn’t be too worried about the country’s economic slowdown. That’s because, compared with other major economies, China still had considerable scope to inject macroeconomic policy stimulus if it was needed.
On Sunday the People’s Bank of China (PBC) announced that it would cut the Required Reserve Ratio (RRR) for banks by one percentage point. The RRR is the percentage of deposits that banks must hold for safekeeping and which they cannot lend out. So a cut in that percentage means they can lend more. It followed a reduction in the RRR by 0.5 percentage points in February.
The shift to a more relaxed monetary policy stance attracted extra attention because the PBC usually makes adjustments in smaller increments. It’s a bit like when the Reserve Bank of Australia (RBA) cuts interest rates by 0.5 percentage points when the consensus forecast was for only 0.25.
But keep in mind that prior to the move the RRR was 19.5 per cent. That level is extremely high by international and Chinese historical standards. A decade ago it was less than half that. What this means is that even though the change was large, the current RRR of 18.5 per cent remains conservative and there’s ample scope to go further.
That said, more rapid credit growth comes with its own risks, namely that quality might be sacrificed for quantity. As a result, expect that future moves will still be made cautiously.It’s been estimated that the latest cut will release between 1 billion – 1.5 trillion Renminbi of new credit into the economy. That sounds like a lot but it needs to be put into some perspective.
Loans in China’s banking system have been growing by around that amount each month this year. So what the RRR cut has effectively delivered is a shot in the arm equivalent to an additional month’s worth of bank credit.
