HYDERABAD: China’s central bank People’s Bank of China (PBOC) is trading monetary policy levers for higher growth. On Wednesday, PBOC launched a $115-billion booster shot to support its sagging economy by cutting its reserve requirement ratio (RRR) by 50 bps effective Jan 6. RRR is the amount of funds banks should keep in reserve. The move will pump $115 billion into China’s financial system, which is staring at a $400 billion liquidity shortfall this month ahead of the Lunar New Year holidays when demand for cash surges.
Given China’s growth has slowed to a 27-year-low in 2019, lack of liquidity during its finest spending season is asking for more trouble.
Which is why PBOC undertook the countercyclical adjustment, its eighth such RRR cut since 2018, to support economic expansion and reduce the cost of corporate financing, particularly, small businesses.
With the latest reduction, RRR now stands at 12.5% for big banks and at 10% for small lenders and by ensuring ample liquidity, PBOC hopes that all burners of consumer spending engine are fired. Just last year, RBI did something similar — injecting liquidity frantically by buying and selling bonds.
Such timely action, along with rising deposits and falling credit growth meant the Indian banking system turned liquidity surplus.
As of December, banks are flush with funds of over `2 lakh crore. Typically, central banks are at the forefront to firefight slowdowns. In the past decade, many central banks have lowered key rates to ensure adequate liquidity supply so that growth doesn’t go sideways.