The stock market in China witnessed a sudden fall on Monday. This was mainly because investors became tensed due to a recent decision by the People’s Bank of China (PBOC). The bank authority decided to put a limit on the amount of cash that lenders can hold in reserves. This decision was given mainly to accelerate the country’s economic growth.
On Sunday, PBOC announced its plan to reduce the limit of the minimum cash amount that commercial banks had to keep in store at the central bank. In economic terms, this is known as the reserve requirement ratio (RRR).
This was the central bank’s fourth significant declaration in 2018. China’s economic pundits are expecting this decision to have remarkable impact on the country’s economic prosperity. This is especially true as currently Beijing is undergoing a trade war with Washington.
Before the decision by PBOC is executed, the applicable RRR stands at 15.5 percent for larger organizations while for smaller banks, it is 13.5 percent. According to the central bank’s spokesperson, the cut in RRR will be enabled from 15 October, 2018, when it will be slashed by 100 basis points.
Few economists weren’t surprised by the move, as they had been expecting RRR cut for multiple reasons. The PBOC is dedicated towards boosting liquidity. October is the month of tax repayments and several debt maturity is also yet to happen. However, for last few years, the central bank’s credit growth hasn’t seen any significant growth, which leads them to ensure an increase in their credit capacity.
For succeeding with long term growth, China needs to manage certain risks and PBOC’s recent decision of slashing RRR is one of the ways they want to achieve their goals.
An increase in U.S. tariffs has certainly impacted Chinese exports. Now Beijing wants to utilize on their domestic demand.
Although some specialists have welcome the rate slash, numerous market observers think the cuts were more than what they previously expected.
A slash of rate by an entire percentage would release liquid cash worth 700 billion Yuan (almost $101.72 billion) into China’s banking system, which is certainly a huge amount. A significant reason behind the government’s amendment in RRR is because it has been worried about a probable economic slowdown.
As a result of the Chinese central bank’s unforeseen announcement, China’s markets witnessed negative trades on its first trading day since the Golden Week holiday. The markets fell more than 3.7% during the first trading day of the week.