China central bank resumes easing cycle to cushion reform pain

February 29, 2016 11:53 AM

China's central bank resumed its easing cycle on Monday, injecting an estimated $100 billion worth of long-term cash into the economy to cushion the pain from job layoffs and bankruptcies in industries plagued by overcapacity.

The People's Bank of China (PBOC) said on its website it was cutting the reserve requirement ratio, or the amount of cash that banks must hold as reserves, by 50 basis points, taking the ratio to 17% for the biggest lenders.

The cut came just days after China used its role as host of the Group of 20 (G20) to reassure trading partners that it did not intend to further devalue the yuan, after a surprise 2% devaluation last August threw markets into a spin.

The PBOC's announcement also comes shortly before the annual meeting of China's parliament, which must try to engineer a huge economic shift toward services and consumption and away from basic manufacturing, while also keeping growth stable. 

The move was a surprise to some observers, given that the PBOC had previously said it would rely more on daily injections of short-term money to keep cash flowing, rather than the long-term addition of funds from an RRR cut.

The cut is effective from March 1, and it comes after signs of increasing tightness in the money market last week, despite repeated daily injections through open market operations, including a 230 billion yuan injection on Monday morning.

"This reflects the central bank is keen to ease liquidity in the China banking sector," wrote Iris Pang, a senior economist at Natixis in Hong Kong.

Pang estimated the move would release 689 billion yuan ($105 billion) into the system for fresh lending; economists at ANZ bank estimated the injection at about 650 billion yuan.

Some of that lending could help struggling industries meet the costs of restructuring.

Economists said the cut suggested regulators were less worried that the move would hammer the exchange rate, and by extension accelerate the rate of capital outflows.

Official data showed China's central bank and commercial banks sold a net 629 billion yuan ($95.61 billion) worth of foreign exchange in December, an implicit outflow from yuan assets.

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