China cuts RRR rate to consolidate economic growth trend amid global fluctuations
Move aimed at consolidating recovery trend
Published: Mar 17, 2023 09:19 PM
This aerial photo taken on Feb. 15, 2023 shows cruise ships docking near the Laowaitan, a signature pedestrian street in Ningbo, east China's Zhejiang Province. As the temperature gradually rises, a series of activities such as night market and iron flowers, a performance of splashing molten iron to create fireworks, are held at Laowaitan to enrich the night life of citizens and tourists.(Photo: Xinhua)

This aerial photo taken on Feb. 15, 2023 shows cruise ships docking near the Laowaitan, a signature pedestrian street in Ningbo, east China's Zhejiang Province. (Photo: Xinhua)

China's central bank, the People's Bank of China (PBC), announced on Friday it was lowering the amount of deposits banks have to set aside, as the world's second largest economy beefs up efforts to accelerate economic growth to withstand external fluctuations, after the world witnessed a grueling week struggling with financial turmoil triggered by the failure of some US banks.  

It also shows the Chinese government's responsibility to the world by not following the US in hiking interest rates, but sticking to an independent monetary policy, experts said. 

The PBC announced on Friday that it would cut the reserve requirement ratio (RRR) for financial institutions by 0.25 percentage points to 7.6 percent effective from March 27.

The move is aimed at pushing the reasonable growth of the economic aggregate and effective improvement of economic quality, keeping the banking sector's liquidity at a reasonably sufficient level, and enhancing the level of policies serving the real economy, the PBC said. 

The policy does not apply to financial institutions that already adopt a 5 percent RRR.

Chinese Premier Li Qiang said on Friday that the State Council should push for all work to get off to a good start, while standing on a new starting point.

Efforts to prevent and defuse financial risks were also reiterated at the meeting, as the meeting stressed that macro policies should be scientifically and accurately implemented, and the bottom line of no systemic risk should be held.

Experts said that the RRR cut, which comes on the heels of the two sessions, shows the "strength" of Chinese policies in consolidating the economic recovery trend following optimization of COVID-19 policies.

"Enforcing monetary policy support in the first quarter is conducive to creating a good start for the real economy, consolidating the recovery momentum since the beginning of this year, as well as further improving expectations and confidence," said Wu Chaoming, deputy head of the Chasing Research Institute.

It will also help stabilize the property market by replenishing liquidity, meeting the financing needs of property developers and residents.

China's key economic data for the first two months this year showed that China has entered a fast lane of recovery, with consumption reversing its downward trend and industrial output growth largely outpacing that of last December.

The PBC cut the RRR twice in 2022, injecting more than 1 trillion yuan ($145 billion) of long-term liquidity into the markets. 

Although some overseas media described the RRR cut as a "surprise," it was also seen by domestic experts as happening very "urgently," as China's economy is still facing uncertainties ranging from volatile global markets, a US crackdown and internal economic problems. 

The unexpected collapse of US-based Silicon Valley Bank and Signature Bank last week triggered intense fluctuations in global financial markets, sending shares and oil prices plunging. Chinese financial markets have also experienced some volatility but have generally been stable. 

"If there is no strong monetary policy support, the time needed for China to see full recovery will be relatively long," Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Friday.

China's RRR cuts, which stand independently from the US' ongoing interest rate hike cycle, also send out a very positive message for world economic recovery, experts said.

"While the US and the West are still on the path of raising interest rates, which are already very high and have directly impacted the development of the global real economy, China is cutting its interest rates. This shows that China is full of confidence in its own development path," Dong Dengxin, director of the Finance and Securities Institute of the Wuhan University of Science and Technology, told the Global Times on Friday.

According to Dong, the key signal from this RRR cut is that China can achieve economic recovery under a relatively loose monetary environment, adding that this has become China's "unique advantage."

The expert also said that China's current interest rate is already at a relatively moderate level. While there is not much room for interest rate cuts, there is still space for RRR cuts, which could be reduced to 7 percent, Dong said.