China Reduces Cash Reserve To Infuse More Money In The Economy

China has taken more actions on Friday for boosting their economy by reducing the cash which banks have kept in reserve. People’s Bank of China has said that reserve requirement ratio would be reduced by 50 basis points for most of the financial institutions. This will be the first ratio cut in the last eight months and nearly $126 billion would be unleashed for long-term lending as a result of this move which will take effect over the coming three months.

The second quarter saw the lowest economic growth for China since the last three decades. The industrial production had also reported the worst growth in the last 17 years and this was a crucial indicator of the economy of the country. The continuing trade war with the US along with other domestic challenges has been seriously affecting the second largest economy of the world. In a statement by Central bank it was said that by the release of 900 billion Yuan, rate cuts will be increasing the fund sources for the financial institutions for providing support to the economy. This will also bring about a reduction in cost of funds of the banks by 15 billion Yuan yearly. This will in turn lead to a reduction in lending rates for the borrowers.

As per Reuters, since 2018 the reserve requirement has been cut seven times by PBOC. It is expected by the analysts that the rates would be made even lower by the banks because of the rising economic pressure. Senior economist at Capital Economics, Julian Evans-Pritchard said that if the problems affecting China’s economy like weak external demand and property construction intensifies over the coming months then the PBOC will be forced to stop at single RRR cut. He also said that this may even then be not enough to prevent further decline in growth.

A long-awaited reform was launched by the central bank the previous month in a way to manage money for supporting employment and growth. The main aim was to make borrowing for companies easier and cheaper. The already prevalent lending rate is being replaced by the Loan Prime Rate. This will become the new benchmark for the banks in the pricing of loans.

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