19 March 2019
China's central bank should continue to support deleveraging efforts as economic growth cools. Photo: Reuters
China's central bank should continue to support deleveraging efforts as economic growth cools. Photo: Reuters

China has no urgent need for bank reserve ratio cut

China is scheduled to release first-quarter economic figures next week. It is widely expected that the data will show a further slowdown in GDP growth in the world’s second-largest economy. Most estimates put the figure at 7.2-7.4 percent, meaning that the economy missed the yearly expansion target of 7.5 percent. Statistics released earlier have shown that trade, fixed-asset investment, industrial output, manufacturing and retail were not doing well.

The central government has already taken action to prevent the economy from slowing further. Last week, the State Council rolled out a slew of pro-growth measures, dubbed as mini-stimulus. The measures unveiled by the cabinet included tax concessions to small and micro enterprises, shantytown reconstruction and more railway initiatives.

Some analysts, meanwhile, have called on the central bank to lower the reserve requirement ratio (RRR) for commercial lenders in a bid to unleash more liquidity and resolve the funding problems of companies.

I personally believe there is no urgent need to slash the RRR. There are at least three reasons for this.

First of all, the economic slowdown has not slipped to an alarming level. The current slowdown is a result of a combination of factors such as the government’s frugality campaign and costs of economic restructuring. It can be seen as short-term pain in a tradeoff for long-term benefit. So long as the fundamentals are not shaken, there is no need to resort to monetary loosening to shore up the economic growth.

Passing the test of 2008-09 global financial crisis, the Chinese economy has grown more resilient to deal with slower growth. Its trade sector, for example, has got used to operating at a thin profit margin.

The labor market, a major concern of both policymakers and general public, is now more tolerant toward a manufacturing slowdown. Last year, China’s newly created jobs outnumbered that in the previous year, even though the economy grew slower. China’s working-age population has been shrinking in the past two years, a significant demographic change that reduces the pressure on employment. 

In addition, a growing service sector means the country does not need to maintain very high degree of growth in the manufacturing sector to boost employment rate.

What actually haunts the labor market is the structural imbalance that sees a shortage of skilled labor but partial oversupply of entry-level service workers. In this sense, the task is not to aggressively boost overall GDP growth but to continue improving the service sector.

Second, market liquidity is not tight, proving little need to reduce the RRR. The Overnight Shanghai Interbank Offered Rate, a major gauge of borrowing costs, stayed below 3 percent most of the time in March and April, showing that funding is relatively inexpensive, at least for now.

Yu’e Bao, a popular online money-market product run by Alibaba, offers a yield of a little more than 5 percent, coming down from nearly 7 percent in the beginning of the year. This also points to ample liquidity in the market, giving little reason for a cut in the RRR ratio.

Third, if the central bank reduces the ratio, the market may take it as a signal of monetary loosening. This will do no good to policymakers’ efforts to deleverage the economy.

Since the central bank maintained a tough stance on a credit crunch in the middle of last year, the market has anticipated that the tightening circle will be long-term. Based on that belief, lenders started to be cautious in handing out loans.

Entering this year, banks and shadow banking agencies have gradually shunned high-risk sectors such as property, coal, cement and steel. Coupled with measures such as short-term depreciation of the yuan, the tightening has helped drive liquidity from within the financial sector to real-economy sectors. This is conducive to help with restructuring and promote a green economy.

Now if the RRR is lowered, more money will be pumped into the market. Too much liquidity is likely to lead to a lending spree that dampens the success already achieved.

But it is not to say the RRR should always be maintained at the current high level.

A lowering of the ratio is needed if market liquidity drains quickly in a changed situation. For example, if too much money flows out of China, as reflected by foreign exchange purchase positions, the RRR should be brought down to make sure there is sufficient liquidity in the system.

But for the time being, that situation is not likely. Although the yuan has depreciated and the US dollar has been gaining strength globally since March, China’s money outflows are not serious. What’s more, investors generally believe the yuan will regain its footing.

– Contact the writer at [email protected]


The writer is an economic commentator. He writes mostly on business issues in Greater China.

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