Will release of $109bn reserve boost China’s flagging economy?

China has slashed reserve requirements for the country’s banks, freeing up an estimated $109 billion of extra cash for infrastructure and investment, in a bid to bolster its vulnerable economy.

Amid signs higher US interest rates and fears of a global trade war are having an impact on the world’s second-largest economy, China’s central bank hopes cutting the reserve requirement ratios (RRRs) by 1% from 15 October will lower financing costs and spur growth.

It is the fourth time this year the People’s Bank of China has cut the reserve ratio, “though this cut was bigger and broader than previous ones” reports the New York Times.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Yet investment growth remains at a record low and net exports continued to drag on growth in the first half of the year.

The cut will fill in the liquidity gap of banks and put no downward pressure on the yuan, the central bank said in a statement, as the country's monetary policy has not been eased.

There are sufficient conditions for the exchange rate to remain basically stable at a reasonable and balanced level, it added.

The move comes as officials have warned that trade frictions with the United States could shave as much as nearly one percentage point from China’s annual economic growth.

In September, the United States imposed tariffs on $200 billion worth of goods from China, dealing it a blow at a time when the country’s economy was already flagging.

Zhang Yi, chief economist at Zhonghai Shengrong Capital Management, said the cut suggested the central bank was worried about the impact of “external shocks” to markets such as the one delivered last week by US Vice President Mike Pence’s criticism of Beijing.

While external factors have certainly played a factor, “the signs of deepening economic troubles have been showing for months” says the New York Times.

Consumers are spending less, infrastructure investment - a pillar of the Chinese economy - has slowed significantly since the start of the year, and companies have defaulted on their bonds in larger numbers.

In response, officials have pledged to pump billions of dollars into infrastructure projects, shored up the value of the currency and moved to backstop a plunging stock market.

Coming on the final day of the National Day holiday, the South China Morning Post says “the central bank’s announcement may also serve as a shot in the arm for the China’s stock market when trading resumes on Monday morning”.

Yet “it will also raise fears that Beijing – under pressure from the higher dollar and tariffs – is again delaying plans to reduce huge debt in the Chinese economy in favour of a short-term fix to stabilise growth”, reports The Guardian.