China gives its slowing economy a new shot in the arm

China is taking new steps to encourage bank lending and stimulate the country's flagging economy.The ...

Posted: Jan. 4, 2019 3:17 PM
Updated: Jan. 4, 2019 3:17 PM

China is taking new steps to encourage bank lending and stimulate the country's flagging economy.

The People's Bank of China is slashing the amount of money that banks are required to hold in reserve, the latest in a series of policy changes the government has taken to support growth.

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The central bank said Friday it would cut its reserve requirement ratio by 1 percentage point over the next month. The reductions will be made in two stages on January 15 and January 25.

Together, the new measures should inject about 800 billion yuan ($116 billion) into the world's second largest economy as growth slows and a trade war with the United States takes its toll.

Economists said the move was partly about managing the amount of money in circulation ahead of Chinese New Year, when cash is often exchanged as gifts.

But Capital Economics said the policy change is "also intended to provide support to the economy and will be reinforced with further easing soon."

Stimulus efforts move up a gear

Analysts at Macquarie Capital said that the rate cut shows government efforts to support the economy have now moved to the "second level" and should signal to investors that more stimulus is in the pipeline.

After decades of sharp expansion, the Chinese economy is cooling. Growth in 2018 is set to be the weakest since 1990, and 2019 looks even worse.

China is feeling the effects of a darkening trade outlook and government attempts to rein in risky lending after a rapid rise in debt levels.

"Given the pressures the economy is facing though, it could still be months before growth stabilizes," noted the analysts at Capital Economics.

Fears about China's economic health have already rattled financial markets. The issue became a major focus for investors this week when Apple (AAPL) warned that it would sell fewer iPhones because of the slowdown.

What remains uncertain is the severity of the slowdown and how far the Chinese government will go in trying to soften its impact. One big wild card is how the trade war between the United States and China will play out in 2019. Beijing said Friday that talks aimed at ending the dispute would resume next week.

Analysts at JPMorgan Chase said that the central bank's action suggests that "the Chinese government is tilting toward a growth-oriented stance."

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.

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