The Fading Growth Engine of China... The Inside Story Behind the Reserve Requirement Ratio Cut

Most of the Funds Released by Reserve Requirement Ratio Cut Used for MLF Repayment... Possibility of Further Cuts
Considering Base Effects, China's Economic Growth Rate Faces Emergency in Q1 Next Year

[Asia Economy Beijing=Special Correspondent Jo Young-shin] The People's Bank of China, the central bank of China, lowered the reserve requirement ratio (RRR) by 0.5 percentage points ahead of the Central Economic Work Conference. This RRR cut had been steadily anticipated since October. Considering the economic situation in the fourth quarter, the dominant forecast was that the RRR cut would occur as early as the end of October or at the latest by December. The People's Bank of China also lowered the RRR by 0.5 percentage points in July when international raw material prices surged sharply.

[Image source=Yonhap News]

Chinese economic media Caixin reported on the 7th, citing experts, that this RRR cut was a predictable measure aimed at inducing financial support for the real economy, especially small and medium-sized enterprises.

The RRR cut is analyzed as a measure to prepare for shocks such as rising international raw material prices, global logistics bottlenecks, strategic difficulties, and partial resurgence of COVID-19.

◆ Measures to Stabilize China's Financial Market = Caixin analyzed that this RRR cut was largely implemented from the perspectives of adjusting capital circulation, optimizing the capital structure of financial institutions, and enhancing financial service capabilities. It explained that the funding sources of financial institutions were effectively expanded to support the real economy.

Wang Yifeng, an analyst at Guangda Securities in China, said, "Compared to the RRR cut in July, this cut was fully predictable," and evaluated it as "a measure with high market acceptance."

Zhong Zhengsheng, chief economist at Ping An Securities in China, said, "The current trend of China's economic recovery is not stable, and structural problems in economic growth remain," adding that this RRR cut measure will serve as a preventive measure against financial risks. He explained that it was implemented as a hedge against potential financial risks through monetary policy easing.

Here, financial risk hedging refers to the Medium-term Lending Facility (MLF). The MLF is a system where Chinese banks borrow funds from the People's Bank of China, the central bank, for periods ranging from as short as 3 months to as long as 12 months. It is known that the scale of MLF maturing this month and in January next year amounts to 1.45 trillion yuan (approximately 269 trillion KRW). This RRR cut is considered an appropriate measure as it allows Chinese financial institutions to hold 1.2 trillion yuan (approximately 223 trillion KRW) in liquidity.

Jiang Yu, chief analyst at Huachang Securities in China, said, "The RRR cut measure will ease the liquidity of Chinese financial institutions, with some funds used for MLF repayments and some for supporting small and medium-sized enterprises."

Some in China point out that this RRR cut measure targets the economy around January to February next year (Chinese New Year). Depending on the situation, there is also a possibility that China may lower the RRR again early next year.

Regarding this, the People's Bank of China emphasized, "This measure is a normal action, and there is no change in China's 'prudent monetary policy.'"

◆ China Preparing for the First Quarter of Next Year = Since last month, there have been many concerned forecasts about the Chinese economy. Considering domestic and international situations, there are numerous forecasts that the fourth-quarter economic growth rate will fall to the 3% range. Some voices even worry about a drop to the 2% range.

The bigger problem is the first quarter of next year. China recorded a remarkable growth rate of 18.3% (year-on-year) in the first quarter of this year, which surprised the world. Considering internal and external situations and the base effect, there is a very high possibility that the growth rate in the first quarter of next year will plummet.

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), also expressed concerns about the Chinese economy.

At a video conference with Chinese Premier Li Keqiang the day before, Georgieva diagnosed that China's growth momentum is noticeably slowing and said, "Since China is an important engine of global economic growth, taking strong measures to sustain quality growth will benefit not only China but the entire world."

The IMF lowered its economic growth forecast for China in October to 8.1% for this year and 5.6% for next year.

The Chinese Academy of Social Sciences has presented a growth forecast of 5.3% for next year. Inside China, forecasts ranging from 5.0% to 5.5% dominate. This is 1 percentage point lower than the Chinese government's target of "above 6%" for this year.

There are also concerns that China may face a dilemma given the limits of Chinese authorities' policies. Monetary and fiscal policies could inadvertently trigger inflation.

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