The People's Bank of China (PBOC), China's central bank, will cut the amount of money banks are required to hold in reserve with it by one percentage point, a move that could pump 1.5 trillion yuan (US$210 billion) of additional liquidity into the banking system to help arrest a deepening economic slowdown. Separate reports out Friday noted revived trade talks were set to resume on Monday.
The policy move was announced hours after Chinese Premier Li Keqiang told the central bank to make universal cuts of the ratio as part of Beijing's efforts to bolster economic growth having cut the RRR four times past year.
The reduction is being made in two equal stages, effective January 15 and January 25, the PBOC said.
A further deceleration is seen this year, with some analysts forecasting growth will cool to almost 6 percent, which would mark China's weakest expansion since 1990.
The twisted and conditional liquidity support is part of the central bank's controversial plan to implement "targeted easing" which is aimed at ensuring funds will end up in hands of the right borrowers such as small factory owners. The government has also ramped up spending on infrastructure to rekindle sluggish demand and investment.
China's economy grew at an annualized rate of 6.5 percent in the July-September period of 2018.
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In December 2018, World Bank said China's economic growth is likely to slow to 6.2% in 2019 from an expected 6.5 percent this year.
This RRR standard adjustment has also triggered the market's expectation of further cuts.
The move, which took effect immediately, could free up more than 700 billion yuan ($101.86 billion), to supplement a base money shortage of 4 trillion yuan before the Spring Festival (starting from Feb 5), as some brokers assessed.
Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed the economy was continuing to lose steam amid increased signs of a pinch from the trade war with the United States.
Lian Ping, chief economist at the Bank of Communications, said the pressure of the economic slowdown would show up in the first half of 2019 when the existing USA tariffs on US$250 billion of Chinese goods would bite deeper into the economy.
"There is room to cut the reserve requirement ratio, given the current relatively higher level compared with other countries", according to Mr Sheng, who said targeted monetary policy tools will be preferred to channel funds into the real economy.