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China To Increase Monetary Stimulus As Growth Dips Due To The Lockdown

The State Council said in a statement that monetary tools “such as an RRR cut” will be used “in a timely and appropriate manner” to maintain reasonably ample liquidity

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China hinted at more monetary stimulus, including a reduction in the reserve requirement ratio for banks, as it ramps up support for an economy strained by rising Covid cases and more lockdowns.

In a statement issued on Wednesday, the State Council stated that monetary tools “such as a reserve requirement ratio (RRR) cut” will be used “in a timely and appropriate manner” to maintain reasonably ample liquidity. 

A reduction in the RRR (the number of cash banks must keep in reserve) could come as soon as this week, given that the central bank typically imposes a reduction within days of a cabinet statement like this.

China's economic outlook is deteriorating as Covid cases reach an all-time high and cities tighten controls to prevent infection spread. Even with a reduction in the RRR and additional monetary stimulus, the economy is still likely to be under pressure from Covid Zero.

Nomura cut its forecasts for China's growth this year and next, citing a “slow, costly and bumpy” reopening of the country.

“We believe the real barrier for the economy is local officials' more zealous implementation of Covid restrictions rather than a lack of loanable funds, Ending Zero Covid as soon as possible is critical to increasing credit demand and boosting growth,” Nomura Holdings’ economists wrote in a note.

As of 1:16 p.m. (local time), China's benchmark CSI 300 Index had fallen 0.5 per cent as the country reported a record-high number of Covid cases. The 10-year government bond yield rose 4 basis points after falling 7 basis points the previous session. The onshore yuan gained 0.28 per cent to 7.1378 per dollar.

As China takes more concerted steps to put a floor under the property crisis, releasing more low-cost cash through RRR reductions may encourage banks to lend to ailing developers.

Regulators asked banks this week to stabilise lending to firms, and major state-owned banks responded by offering at least 220 billion yuan (USD 31 billion) in new credit to developers.

A reduction in reserve ratios would also replace some of the massive policy loans maturing in the coming months, alleviating liquidity stress that would otherwise worsen as cash demand from businesses and residents rises toward the year-end holiday season. Last week, the rate on a one-year negotiable certificate of deposits, a key indicator of interbank borrowing costs, reached its highest level in nearly 11 months.

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china Covid 19 slowdown