China’s latest easing move signals that shoring up growth is the government’s top priority even if it further weakens its currency or adds to leverage that threatens the longer-term health of the world’s second-biggest economy, Bloomberg said, citing analysts.
The People’s Bank of China said Monday it’s cutting the amount of cash the nation’s lenders must lock away.
The move marked the first time in four months that the central bank has used one of its traditional monetary-easing tools, despite mounting signs of a weaker economy and a stock market in near-freefall.
The action came days before Premier Li Keqiang is expected to set the bar lower for gross domestic product with a 2016 target expansion range of 6.5 percent to 7 percent, compared with last year’s goal of around 7 percent.
The renewed focus on growth could be at the expense of any effort to rein in ever-increasing debt: Chinese banks extended a record amount of new loans in January.
Meantime, the renminbi is down 3.6 percent against the dollar since October.
“This move suggests that, in the end, supporting growth takes priority over other considerations,” Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong, said in a note.
“[The] move matters in terms of what it signals about the policy direction,” said Kuijs, who formerly worked at the World Bank and International Monetary Fund.
PBOC governor Zhou Xiaochuan highlighted scope for further action ahead of a Group of 20 meeting in Shanghai last week, saying China had “multiple policy instruments” to address growth risks.
The half percentage point cut in the required reserve ratio will inject about 685 billion yuan (US$105 billion) into the financial system, Bloomberg Intelligence estimated.
Whether that money actually stimulates the economy is another matter. Credit Suisse Group AG economist Tao Dong said the impact depends on how much banks are willing to lend to home buyers.
Roberto Perli, a former Federal Reserve official who’s now a partner at Cornerstone Macro LLC in Washington, said in a note that the action probably isn’t a “net monetary easing” because it replaces temporary cash injections.
Or, as University of California at San Diego professor Victor Shih says, the move merely counteracts money outflows of recent months.
China may not be done easing. The latest cut takes the ratio to 17 percent for the biggest banks, still one of the highest such levels in the world.
The central bank said it lowered the reserve ratio to guide stable and appropriate growth in credit.“This is unlikely to be the last RRR cut,” said Tim Condon, head of Asian research at ING Groep NV in Singapore.
“The question is, how long does it take for them to follow up with an interest-rate cut.”
The Shanghai Composite Index has declined 24 percent this year, the worst performer among 93 global equity indexes.
Foreign-exchange reserves have plummeted US$762 billion since mid-2014 as the government tried to defend a falling renminbi.
Injecting stimulus in the form of debt may make things worse in the long run.
Goldman Sachs Group Inc.’s investment management division has warned that China’s debt-to-GDP ratio increase is among the highest in recent history.
Debt will peak at 283 percent of GDP in the coming years, according to the median estimate of eight economists in a Bloomberg News survey published in February.
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