China cuts bank reserve ratio to boost economy

China's central bank said Wednesday it would make an across-the-board cut in the percentage of funds banks must hold in reserve, the first such cut in nearly three years as the world's second-largest economy falters. The People's Bank of China said in a statement the reserve requirement ratio would fall by 0.50 percentage points, effective from Thursday.
The last time the central bank implemented an across-the-board cut in reserve requirements was May 2012, according to previous statements. The measure, intended to free up bank lending, followed the announcement last month that gross domestic product rose an annual 7.4 percent in 2014 - a 24-year low. The central bank said it would "promote the healthy and stable operation of the economy".
Before the move, the level for major banks stood at 20 percent, while that for small and medium-sized banks was 16.5 percent, the official Xinhua news agency reported. There would be an additional 0.50 percentage point cut for some banks lending to areas favoured by government policy, including agriculture and hydropower projects, the statement said. The Agricultural Development Bank of China, a institution set up to support government policy, will enjoy an additional cut of four percentage points, it said.
In November the central bank slashed benchmark interest rates for the first time in over two years, and analysts had expected further monetary easing as the economy showed more signs of distress. "Today's announcement isn't a surprise," said Mark Williams, chief Asia economist for Capital Economics. "It is consistent with the more accommodative stance being taken since the benchmark interest rate cut in November," he said in a research note, estimating the move would pump 600 billion yuan ($96 billion) into the banking system.
A survey at the weekend showed China's manufacturing activity contracting for the first time in more than two years, signalling further downward pressure on the economy. The Purchasing Managers' Index (PMI) released by the government's National Bureau of Statistics came in at 49.8 last month. A figure above 50 signals expansion, while anything below indicates contraction. "January PMI was weaker than expected and there are signs of capital outflows. If the central bank doesn't lower reserve requirements, corporate financing costs would become an issue," Liu Ligang, Hong Kong-based economist for ANZ Bank, told AFP.