More Cuts to Banks’ Reserve Requirement Under Consideration, Premier Says

Premier Li Keqiang said Monday that the government will study further cutting banks’ reserve requirement ratios (RRRs), among other measures, to lower borrowing costs for small businesses.

The premier’s announcement is being seen as a sign that the People’s Bank of China (PBOC) could ease monetary policy in the coming year amid slowing economic growth.

Policymakers will continue to take measures, including overall and targeted RRR cuts, relending and rediscount, in a bid to lower real interest rates and financing costs for businesses, Li said during a visit to China’s southwestern province of Sichuan, according to the State Council website. Relending and rediscount are monetary tools that the central bank uses to inject funds into the banking system.

As many are predicting China’s GDP growth could dip to 6% or even lower in 2020, debate over monetary and fiscal policies has flared. Yu Yongding, an influential economist and former PBOC adviser, has called for greater monetary stimulus and government spending to shore up the slowing economy. But other economists doubt the effectiveness of such measures and have warned about associated risks.

China’s central bank has lowered banks’ RRRs across seven rounds in 2018 and 2019, releasing trillions of yuan into the financial markets. The latest across-the-board cut took place in September, when the PBOC made a 50-basis-point cut, releasing 800 billion yuan ($114.2 billion) in liquidity. However, the country’s GDP growth is expected to hit another near 30-year low this year amid sluggish domestic and global demand, as well as the effects of the China-U.S. trade war.

Although growth in consumption and industrial output both rebounded last month, economists from Nomura International (Hong Kong) Ltd. believe that growth headwinds remain strong, especially from “worsening fiscal conditions, a cooling property sector and weakening exports.”

Some economists have expressed doubts about whether monetary and fiscal stimulus can work because such policies have yet to turn the situation around. RRR cuts and other monetary easing have not boosted lending substantially due to the lack of credit demand. Some banks complained that there is a lack of suitable projects that meet their lending criteria. Central bank data show that annual growth in outstanding medium- and long-term loans to nonfinancial companies, government departments and public institutions has slowed from 15.9% in 2017 to 11.8% in 2018. At the end of November, the growth rate slowed even more to 11.2% year-on-year.

Growth in fixed-asset investment and government-driven infrastructure investment remained sluggish this year, though policymakers have taken measures such as allowing local governments to sell more bonds in an effort to boost infrastructure investment.

Although the government has cut taxes this year, major industrial companies’ profits fell 2.9% year-on-year in the first 10 months, 0.8 percentage points more than in the first three quarters, according to official statistics.

Many economists believe that “structural problems” are the key obstacle facing China’s economy. Such problems hinder the effects of macroeconomic control policies, said Zhu Baoliang, an economist with government-linked think tank the State Information Center, said at a press briefing earlier this month. An aging population, lagging reform of state-owned enterprises, and market access restrictions in some industries are among the structural problems that economists have raised.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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