China Moves to Boost Slowing Economy
People’s Bank of China reduces amount of money banks must hold in reserve, signaling concerns amid a property market slump
By Stella Yifan Xie
The People's Bank of China said it would reduce the reserve requirement ratio by 0.5 percentage point starting next week./ PHOTO: SHELDON COOPER/ZUMA PRESSHONG KONG—China’s central bank said it would reduce the amount of money banks are required to set aside, as it moved to stimulate a slowing economy that has been weighed down by a slump in the property market.
The effort to inject liquidity into the financial system signals Beijing’s growing concerns about the growth outlook for the world’s second-largest economy.
The move comes as the government has taken a flurry of measures to avoid a downward spiral in the housing market and stabilize heavily indebted developers such as China Evergrande Group.
A downturn in the property sector is the biggest of several headwinds buffeting China’s economy, including an energy-supply crunch and subdued consumption caused by some of the world’s toughest Covid-19 policies.
On Monday, the People’s Bank of China said it would reduce the reserve requirement ratio for banks by 0.5 percentage point to 8.4%, starting Dec. 15, which would unleash about 1.2 trillion yuan, or $188.3 billion, into the financial system.
It was the second such move this year after an earlier one in July.
Separately on Monday, the Communist Party’s top decision-making body said that stability is the “top priority” for China’s economy next year, signaling that Beijing will shift toward supporting growth in 2022.
In its meeting, chaired by Chinese President Xi Jinping, the Politburo also called for better meeting the demand of home buyers, saying it would promote a “virtuous cycle” in the real-estate market and “healthy development.”
“China has entered an easing cycle,” said Larry Hu, chief China economist at Macquarie Group, adding that policy makers are expected to gradually move towards supporting growth in the next six months to a year.
Some economists expect that China could make another cut to the reserve requirement for banks in coming months.
China’s easing contrasts with the policy direction of the U.S. Federal Reserve and central banks in other developed economies, which are planning to wind down pandemic-era stimulus to curb high inflation.
The PBOC said on Monday it would continue to maintain a stable monetary policy and avoid flooding the economy with stimulus.
The bank said part of the released liquidity would be used by banks to repay loans issued by the central bank to lenders.
The central bank’s move, which came sooner than some economists expected, signals growing concern about an economy that is losing momentum, particularly because of the weakening property market, which accounts for about a quarter of China’s economic activities.
Sales by China’s top 100 developers dropped for the fifth straight month in November, shedding 37.6% in value from a year earlier, according to China Real Estate Information Corp.
The cut in the reserve-requirement ratio could spur banks to help support state-backed infrastructure or increase mortgage-lending, though its impact on the overall economy will be “moderate,” according to Iris Pang, an economist with ING.
China’s gross domestic product is widely expected to grow by around 8% this year, in large part due to the persistence of its export strength.
Economists in recent weeks predicted that China’s GDP could slow to about 4.5% to 5.5% next year as property drags persist and a boom in exports fades.
On Friday, Chinese Premier Li Keqiang signaled that the cut was coming in a meeting with the International Monetary Fund’s head Kristalina Georgieva.
He said the cut was aimed at boosting liquidity and stability for smaller businesses.
On the same day, multiple Chinese authorities issued statements saying they would help manage Evergrande’s debt problems, in what appeared to be a coordinated effort to calm markets.
The government of Guangdong, the company’s home province, said it would assist the developer with risk management, and other regulators stressed they would work to keep the market stable.
Economists say that while China has started taking steps to limit the fallout of its property curbs, such as easing restrictions on mortgage loans and promising developers easier fund transfers to pay off debts, they may not be sufficient for the real-estate market to escape a sharp decline that could spark a prolonged slowdown of the broader economy.
On Monday, Evergrande’s shares fell almost 20% to 1.81 Hong Kong dollars a share, equivalent to $0.23, closing at their lowest level since 2010, FactSet data showed.
Authorities are injecting liquidity into the economy as the country’s inflationary pressure may be easing.
Economists expect that year-on-year growth of China’s producer price index, which rose at its fastest pace in more than 25 years in October, will have pulled back in November when the latest data is released on Thursday.
Still, some argue that the cut in reserve-requirement ratio alone will do little to help avert a downward trend of the economy.
The country’s recovery remains deeply imbalanced, with consumer demand lagging behind even as exports drive growth.
The latest Omicron variant could spur Beijing to double down on its tight Covid-19 restrictions and further depress consumption.
On its own, Monday’s move by the central bank will only have a small economic impact, wrote Julian Evans-Pritchard, senior China economist at Capital Economics, in a research note.
“Without a significant relaxation of the quantitative restrictions on credit growth, this alone is unlikely to prevent China’s economy from slowing further,” he said.
—Grace Zhu contributed to this article.
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