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Experts see macro policy shield for economy

Continuous policy measures to protect China’s economic recovery from external uncertainties can be expected after the country’s central bank strengthened policy support with a cut in financial institutions’ required reserves, experts said on Monday.

The decision to cut the reserve requirement ratio, which determines the amount of cash that banks must hold as reserves, has delivered a clear signal that Chinese policymakers are keen to maintain macroeconomic policy support amid rising global financial volatility and economic downside risks, they said.

On Friday, the People’s Bank of China said it would reduce the reserve requirement ratio for financial institutions by 0.25 percentage point on March 27 to keep liquidity in the banking system reasonably ample.

The move is estimated to release about 500 billion yuan ($72.67 billion) into the market, helping stabilize borrowing costs and strengthen domestic banks’ ability to counter any spillover of rising global financial risks, experts said.

“More importantly, the cut sends a signal that policymakers are taking a proactive approach to support the economy, as the relaxation comes even as economic and financial data is picking up,” said Zhong Linnan, a senior macroeconomic analyst at GF Securities.

More support in terms of monetary, fiscal and industrial policies may be in the pipeline, Zhong said, noting that the central bank has stressed that the cut is part of “an optimal combination of macro policies” to serve the real economy.

Experts said it is possible that loan prime rates — China’s market-based benchmark lending rates — may slightly decline this year and help bolster domestic demand. On Monday, the one-year loan prime rate was kept unchanged at 3.65 percent, according to the PBOC.

“The scope for and possibility of loan prime rates declining will remain during the rest of the year, as the cut in the reserve requirement ratio will help tamp down the funding costs of banks,” said Yan Se, an associate professor of applied economics at Peking University’s Guanghua School of Management.

He said that China’s monetary policy is expected to remain relatively accommodative this year to expand domestic demand and consumption, which will be key to offsetting the downside risks facing exports because the stress on the international banking system can hinder global credit expansion and impair economic growth.

As the US Federal Reserve and other central banks have raised interest rates at the fastest pace in years to curb inflation, a growing number of banks are caught in a liquidity strain.

Following the failure of US lenders Silicon Valley Bank and Signature Bank, Swiss lender Credit Suisse — a global systemically important bank — reached a rescue deal with UBS over the weekend whereby the latter will acquire it for 3 billion Swiss francs ($3.23 billion).

Experts warned that the turmoil could further evolve as the Fed’s rate hike cycle is yet to come to an end, with its latest interest rate decision due to be unveiled on Wednesday.

Despite the rising external fragility, China is still capable of achieving its annual GDP growth target of around 5 percent, according to Yan.

It is likely that China’s GDP will expand by more than 5.5 percent this year, he said, thanks to the economy’s internal momentum to recover from the impact of COVID-19, continuous policy support and last year’s low comparison base.
Source: China Daily

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