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Market Extra: China’s central bank cuts reserve requirement ratio in ‘begrudging’ move

China’s central bank, as expected, cut the amount of reserves the nation’s banks must set aside on Friday — a move described as the bare minimum by one economist as Beijing attempts to support an economy undercut by COVID-19 lockdowns and a property downturn.

The People’s Bank of China said it would cut the reserve requirement ratio, or RRR, by 0.25 percentage point, bringing the weighted average RRR level to 8.1%, according to Dow Jones Newswires. The move releases 530 billion yuan, or around $83 billion, into the economy. The average RRR had stood at around 8.4% after a 0.5 percentage point cut in the RRR in December that provided around 1.2 trillion yuan in liquidity.

The PBOC made an additional 0.25 percentage point cut for some rural banks and locally operated city commercial banks in a move aimed at boosting the agricultural sector and small businesses. News reports said Chinese authorities are pressing commercial lenders to lower their deposit rates.

The move, which takes effect April 25, comes two days after China’s State Council, the country’s chief administrative authority, dropped a strong hint that it expected an RRR cut. But the central bank’s response “was clearly done begrudgingly,” said Craig Botham, chief China+ economist at Pantheon Macroeconomics, in a note.

“The central bank continues to argue that monetary transmission, not policy, is the main problem, and urged banks to cut deposit rates today, to aid the recovery,” Botham said.

The 0.25 percentage point cut, assuming the central bank takes no further action this month, is the smallest monthly change in the RRR on record, he said, and noted that even with the move, the PBOC has still withdrawn liquidity from the financial system on a net basis so far in April thanks to repo operations.

The real problem for China is the weak economy, weighed by the nation’s zero-COVID policy, which recently resulted in a sweeping and controversial lockdown of Shanghai, the country’s largest city with more than 25 million residents, and the downturn in the property sector, Botham said.

Those factors, along with export headwinds, are undercutting activity and demand, he said, while demand for loans remain weak and “no one in their right mind will buy a house from a developer which may go out of business before finishing construction.”

That means rate cuts “will have minimal effect on economic growth, without a jolt to demand,” he said. “Fiscal stimulus, however, still looks focused on supply side issues.”

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