China’s central bank is prepared to take its strongest action since 2012 to loosen monetary policy if economic growth slows further, by cutting the amount of cash that banks must keep as reserves, sources involved in internal policy discussions say.
A cut would be triggered if growth slips below 7.5% and towards 7%, they said, and would come on top of money market operations and currency intervention via state banks that traders say has already loosened monetary conditions.
Apart from supporting a stumbling economy, the stronger action of cutting bank reserves would provide a cushion against any shocks from financial reforms that the central bank is widely expected to push through this year, including a widening of the yuan’s trading band to give the currency more room to rise or fall each day and allowing banks more room to set deposit rates.
“The economy faces big downward pressure,” said a senior economist with the State Information Centre, a top think-tank affiliated to the National Development and Reform Commission, the country’s top economic planning agency.
“Cutting RRR is likely if economic growth slows further. But they may still need to wait and see the first-quarter economic data,” said the economist, who requested anonymity due to the sensitivity of the matter. The RRR is the reserve requirement ratio, the official name for bank reserves.
The concern is that the financial reforms could weigh on an already slowing economy, so the central bank will be prepared to free up some cash by cutting bank reserves if need be to give the economy support, the sources at top government think-tanks said.
Private economists have suspected that the central bank might be willing to cut the RRR, but the sources provided the first confirmation that the central bank is discussing such an option. Since May 2012, major banks have had to keep a fifth of their cash as reserves.
Most of the top think-tank economists believe the central government would lean on fiscal policy to do its part to support growth, repeating the mini-stimulus seen last year when Beijing made targeted infrastructure investments, among other measures.
Trade data last weekend shook markets globally by showing an unexpected fall in exports in February of 18% compared with a year earlier. Purchasing managers’ indexes this year have suggested growth in factory-sector activity — for years the engine of China’s economy — is stalling.
China’s consumer inflation hit a 13-month low of 2% in February, a sign