The People’s Bank of China (PBOC) announced over the weekend its decision to ease monetary policy in an effort to increase liquidity and stimulate growth in the world’s second largest economy.
The Chinese central bank reduced the ratio of funds banks must hold as reserves, in an apparent effort to increase lending, which has fallen sharply in China. On Saturday, the PBOC cut the reserve requirement ratio by as much as 50 basis points (half a percentage point) for the largest Chinese commercial banks.
The move is expected to inject about 400 billion yuan ($64 billion) into the banking system, which comes after a little more than two months since the last reserve requirement cut. This reflects the Chinese policy makers’ efforts to “engineer a path of well-paced loosening” as they seek to cushion against a liquidity shortage.
Data shows a 46 percent drop in net credit expansion in January from a year earlier. Evidence of a serious slowdown in China, with the economy appearing to be decelerating, pushed the PBOC to ease monetary policy further. Data on January credit growth was viewed as “very weak,” even when allowing for distortions created by the Chinese New Year holiday.