China to free up more cash for economy amid trade war with US

People's Bank of China (PBC) Photo: Biying

China's central bank has announced to lower the reserve requirement ratio (RRR) for large commercial banks, local commercial banks, and foreign banks in the country by one percentage point, effective from October 15.

The cut, the fourth by the People's Bank of China (PBC) this year, will free up 750 billion yuan ($109 billion) for the economy.

"One percentage point reserve ratio cut is reasonable and moderate and will not lead to depreciation pressure," the PBC said in a statement issued on its website.

"Overall monetary policy would remain prudent and neutral, and overall liquidity in the banking system is stable," it added.

The PBC's easing measure follows weak investment and manufacturing data, and comes as an intensifying trade war with the US increases pressure on growth in the world's second-largest economy.

Analysts believe the latest move by the PBC is an attempt to bolster a slowing economy.

China has already taken steps such as tax cuts, infrastructure spending, and monetary policy easing in a bid to spur economic activity.

Xu Hongcai, deputy chief economist at the China Center for International Economic Exchanges, a Beijing think tank, said the cut was "very timely".

"The trade war's impact on the economy is showing. There is room for further reductions and I expect another one percentage point cut by the year-end," Xu added.

However, the cut also raises fears that China is again delaying plans to reduce huge debt in the economy in favor of a short-term fix to stabilize growth.

Meanwhile, Beijing's latest move to loosen monetary policy also carries the risk of further weakening the yuan, which is down almost 6 percent against the dollar this year.

The Chinese yuan slipped 0.4 percent versus the dollar on Monday.

China's stock markets have also been hit in recent months by fears about the health of the country's economy and the intensifying trade war.

The benchmark Shanghai Composite Index dropped more than 3 percent on Monday after being closed all last week for a week-long national day holiday.

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