- Chen Kang, analyst at Shenwan Hongyuan Securities
The People's Bank of China announced that it cut the level of funds that commercial banks must hold in reserve by one percentage point. The central bank lowered the amount of deposits it requires banks to hold as reserves to 18.5% from 19.5% effective April 20, unleashing a substantial amount of cash into the economy. The decision came after official data showed that China's economy grew 7.0% in the first quarter, the slowest pace since the global financial crisis in 2008. Data on industrial output, retail sales and fixed asset investment also came against economists' expectations, indicating that China's officials need to act to prevent a further slowdown. While most analysts had predicted some sort of easing of the reserve ratio, the cut appeared to twice as big as usual. The PBoC last slashed the RRR for all commercial banks by 50 basis points on February 4, the first industry-wide cut since May 2012. The central bank has also cut interest rates twice since November in an attempt to lower borrowing costs and underpin demand. Yet, while short-term money rates have declined in recent weeks, long-term lending to the real economy has shown little sign of reaction.
Moreover, in a statement, the PBoC said it will provide an additional one-percentage-point RRR cut to banks for agricultural services and a further two-percentage-point cut to the Agricultural Development Bank of China.
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