Yellow Light on China’s Economy... Additional Reserve Requirement Ratio Cut in September 'Likely'

Premier Li Keqiang emphasizes support for labor-intensive industries after mentioning 'employment multiplier effect'
Chinese economic sector expects fiscal policies such as further reserve requirement ratio cuts amid growth slowdown concerns

[Asia Economy Beijing=Special Correspondent Jo Young-shin] As Chinese economic indicators show signs of slowdown, falling short of market expectations, the Chinese leadership has decided to prioritize employment policies in the second half of the year.

According to Chinese media including the official Xinhua News Agency on the 17th, Premier Li Keqiang held a State Council executive meeting the previous day and instructed to fully strengthen the employment-first policy.

Premier Li diagnosed the current economic situation, saying, "The international economic situation is complicated due to abnormal weather such as floods, the resurgence of COVID-19, and rising international raw material prices." He emphasized, "We must focus all efforts on epidemic control, flood prevention, and disaster recovery to prevent additional damage."

[Image source=Yonhap News]

Premier Li continued, "It is necessary to stabilize employment for college graduates, migrant workers (nonggongmin), and marginalized groups," and instructed to strengthen financial support policies such as tax and fee reductions for enterprises. He pointed out that fiscal and monetary policies for labor-intensive industries are needed to expand employment. This means supporting labor-intensive companies that have a high employment-inducing effect to amplify the employment multiplier effect, and can also be interpreted as meaning "it is acceptable to inject money if necessary."

In this regard, some expect that the Chinese government may introduce financial policies such as an additional cut in the reserve requirement ratio (RRR) by the end of the third quarter.

Global Times reported that July industrial production and retail sales, among Chinese economic indicators, fell short of market expectations, and that the State Council presented economic operation guidelines for the second half of the year.

In fact, the National Bureau of Statistics released data the previous day showing that July industrial production increased by 6.4% year-on-year but fell short of the previous month's growth rate of 8.3%. The 6.4% is significantly below the market forecast of 7.8%. Retail sales also rose 8.5% year-on-year but lagged behind the market expectation of 11.5%. The National Bureau of Statistics analyzed that the resurgence of COVID-19 leading to movement restrictions and reduced operations for epidemic prevention, as well as floods, affected July industrial production and retail sales.

[Image source=Yonhap News]

Hu Qimu, a researcher at Sinosteel Economic Research Institute, said, "Due to the overlap of floods, the resurgence of COVID-19, and the traditional off-season (June to August), major economic indicators showed a gentle curve but all remain within expected ranges," adding, "Considering base effects, the Chinese economy continues a moderate growth trend."

Tian Yun, Vice Chairman of the Beijing Economic Operation Association, forecasted, "China's GDP growth rate in the third quarter is expected to be around 5.9%, and the annual rate will be about 8.3%." He also said, "We expect a more proactive fiscal policy from the government around the end of the third quarter, which includes an additional cut in the reserve requirement ratio."

The People's Bank of China, the central bank, lowered the reserve requirement ratio by 0.5 percentage points on the 15th of last month as market conditions worsened due to the sharp rise in international raw material prices. With the RRR cut, Chinese financial institutions secured 1 trillion yuan (approximately 177 trillion won) in liquidity and injected funds into the market.

Chinese securities firms such as Haitong Securities also foresee the possibility of further RRR cuts by the Chinese government depending on market uncertainties and conditions.

Fu Linghui, spokesperson for the National Bureau of Statistics, assessed the Chinese economic situation, saying, "Considering the sporadic outbreaks of COVID-19 and natural disasters affecting some regional economies, the economy remains in an unstable state."

This content was produced with the assistance of AI translation services.