China is willing to release $70 billion related to banks to underpin the slowing economy

November 28, 2022: On Friday, China said it would cut the cash that banks are holding as reserves for the next time this year, drawing about 500 billion yuan in long-term liquidity propping up the faltering economy.

The People’s Bank of China added it would cut the reserve requirement ratio for the banks by 25 basis points, effective from December 5. The central bank said it would lower financial institutions’ weighted average ratio to 7.8%.

Following a 25-bp reduction in April, the cut was widely expected after state media quoted the cabinet saying China would use timely reserve ratio cuts, alongside different monetary policy tools, to keep liquidity reasonably ample.

The PBOC walks a tightrope on policy, which seeks to support the slowing economy but is eager to avoid significant rate cuts that become inflationary fuel pressures and is risking the outflows from China as the Federal Reserve and different central banks increase interest rates to fight inflation.

The world’s second-significant economy suffered a major slowdown in October, and the latest spike in COVID-19 cases is deepening concerns about growth in the previous quarter of 2022. The economy was under constant pressure from a downturn, weakening global demand for Chinese goods.

On Monday, the central bank keeps its benchmark lending rates unchanged for the third month. A weaker yuan and persistent capital outflows limit Beijing’s ability to ease monetary rules to support the economy.

In recent months, the administration has been rolling out a flurry of policy measures supporting the growth that also focuses on infrastructure spending and limited support for consumers that loosens financing, rescuing the property sector.

Chinese cities have imposed lockdowns and different curbs to rein in a renewed increase in coronavirus cases. This darkens the economic outlook and dampens hopes that China will ease its harsh, outlier stance on COVID sooner.

The economy increased just 3% in the first three quarters of 2022, well below the target of nearly 5.5%. Analysts widely expect full-year growth to be just over 3%.