China to cut banks' reserve requirement ratios, taxes

16 2018 shows a traffic jam at a crossroad in the city centre of Beijing at night

16 2018 shows a traffic jam at a crossroad in the city centre of Beijing at night

The cut comes amid mounting worries about the health of the world's second-largest economy, which is facing both slowing demand at home and punishing USA tariffs on its exports.

"There is room to cut the reserve requirement ratio, given the current relatively higher level compared with other countries", according to Mr Sheng, who said targeted monetary policy tools will be preferred to channel funds into the real economy.

"At present, the economy is facing very big downward pressure amid internal and external troubles".

China will likely cut reserve requirement ratios (RRR) again this month and improve credit conditions ahead of the annual Lunar New Year in China which will result in a tightening of liquidity.

In addition, the central bank will likely inject more funds to the banking system through TMLF loans, a RRR cut or a targeted RRR cut around the Chinese New Year holiday falling on 5 February this year. The size of the move was on the upper end of market expectations.

"It is hard to clearly understand the overall policy effect as every institution has to make their own calculations", said Ding Shuang, chief Greater China economist at Standard Chartered Bank.

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Consumption will remain the main driver of China's economy, as weaker credit growth weighs on investment and slowing global demand and higher U.S. duties on Chinese good take a toll on the country's exports, the report said.

The reductions will be made in two stages on January 15 and January 25. It is the first cut since October last year and the fifth in a year.

Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed the economy was continuing to lose steam amid increased signs of a pinch from the trade war with the United States. Early indicators for December signal the economic slowdown is deepening, after official data showed industrial production growth was the weakest in a decade and industrial profits fell for the first time in nearly three years in November.

China made its first major monetary policy easing announcement of 2019 on Friday as Beijing prepared to roll up its up sleeves to battle a year that is expected to be filled with economic hardship as well as numerous other challenges at home and overseas, Trend reports referring to South China Morning Post.

Analysts at JPMorgan Chase said that the central bank's action suggests that "the Chinese government is tilting toward a growth-oriented stance".

Cutting benchmark interest rates may be a last resort as that could weigh on the yuan CNY=CFXS and fuel debt risks, analysts say. The government has also ramped up spending on infrastructure to rekindle sluggish demand and investment.

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