China to cut reserve requirement ratio by 1 percentage point

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China's central bank will further encourage financial institutions to support private enterprises, especially small and micro-sized firms in 2019.

China's economic growth appears to be slowing faster-than-expected amid escalating risks of a synchronized global slowdown, with manufacturing activity contracting in December for the first time in more than two years.

The analysts said the central bank may cut the reserve requirement ratio further, and pump more money into the economy in the form of infrastructure investment and tax cuts.

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

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

But tighter liquidity conditions are possible before the Spring Festival in early February, they said, which requires proper liquidity operations from the central bank to prevent volatility and maintain lower market interest rates. Medium-term Lending Facility loans maturing in the first quarter won't be rolled over, and the amount of liquidity released will be able to offset the funding squeeze ahead of the Chinese New Year, it said.

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The reductions will be made in two stages on January 15 and January 25. It is the first cut since October last year and the fifth in a year.

The twisted and conditional liquidity support is part of the central bank's controversial plan to implement "targeted easing" which is aimed at ensuring funds will end up in hands of the right borrowers such as small factory owners.

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.

In addition, the PBoC pledged to keep the yuan exchange rate basically stable at a reasonable and equilibrium level with use of a variety of monetary policy tools, according to its Q4 monetary policy statement released on 27 December.

But analysts see a further deceleration this year, even if a trade deal with the United States is reached.

Still, economic growth is thought to have cooled to around 6.5 percent previous year - which would be the weakest since 1990 - in line with the target but down from 6.9 percent in 2017.