China to Cut RRR amid Slower Economic Growth

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The People's Bank of China (PBOC) decided Friday to cut the reserve requirement ratio (RRR) for RMB deposits by 1 percentage point.

This RRR standard adjustment has also triggered the market's expectation of further cuts.

The USD/CNH currency pair is expected to trade towards 6.60-6.70 as the US and China are increasingly likely to reach a trade deal by the March 1 deadline, according to the latest research report from Scotiabank.

Economists believe the government could take more fiscal steps by cutting taxes and boosting spending on infrastructure, amid expectations that the budget deficit ratio could be lifted to 3 percent in 2019 from 2.6 percent a year ago.

"The old playbook of China's economy seems to be back", said Shao Yu, chief economist at Orient Securities in Shanghai.

The government last week approved local governments to issue bonds worth 1.39 trillion yuan, made up of 810 billion yuan in the special objective bonds and 580 billion yuan in general bonds.

The government maintains last year's economic growth will be on target at around 6.5 per cent, slowing from 6.9 per cent in 2017.

In the same survey, an index that indicated bank loan demand in small and micro-enterprises increased to 67.9 in the fourth quarter, up from 67.1 in the third quarter, and it is also higher than the indices for medium-sized and large companies, reflecting small-scale businesses' stronger desire to obtain credit.

China's central bank has announced more monetary easing in the form of cutting the minimum reserve level for commercial banks by a total of one percentage point.

It was the first policy move after the State Council, the country's cabinet, said last month that China would improve its policies on targeted reserve ratio cuts to better support the private sector as well as small businesses.

After the visit, Li held a meeting at the China Banking and Insurance Regulatory Commission, calling for more policy support for the real economy, private firms, and small and micro-sized enterprises in particular.

Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed China's economy was continuing to lose steam.

Lian Ping, chief economist at the Bank of Communications, said the pressure of the economic slowdown would show up in the first half of 2019 when the existing U.S. tariffs on US$250 billion of Chinese goods would bite deeper into the economy.