RRR cut helps bolster virtuous cycle of confidence and vitality

China will cut the reserve requirement ratio by 0.5 percentage points from Feb 5, and the country lowered the interest rate of rediscount for loans to the agricultural sector and small enterprises by 0.25 percentage points from Thursday.

China's efforts to stabilize economic growth expectations are at a critical juncture and greater efforts should be made to sustain the economic recovery. Statistics show that in December, the decline in China's consumer price index and producer price index had both narrowed, and the growth rate of exports has picked up for two consecutive months. At the same time, the growth rate of social financing, broad money supply and loans has remained at about 10 percent, higher than the nominal economic growth rate. However, the country's economic recovery still faces uphill challenges and the authorities need to roll out a combination of policies in a show of its determination to stabilize the economy, the market, and the expectations.

The RRR cut will enhance confidence, expand aggregate demand, and create conditions for the implementation of policy measures taken to keep the economy operating within a reasonable range. The cut will provide liquidity to the market of about 1 trillion yuan ($140 billion), which will provide strong support for the growth of money supply and credit. At the same time, lowering the interest rate of rediscount for loans to the agricultural sector and small enterprises by 0.25 percentage points will guide financial institutions to expand lending to projects related to agriculture, rural areas and farmers, and reduce financing costs for related businesses, which will stimulate their credit demand and investment and better promote a virtuous economic and financial cycle.

The RRR cut will also help optimize the liquidity structure of the banking system and reduce the cost of funds for banks. The country has been promoting the steady decline in social comprehensive financing costs, but this effort has been constrained by the narrowing net interest margin of banks, so it is necessary to reduce the cost of bank liabilities. The central bank's latest move can release more long-term and stable low-cost funds for banks, and create favorable conditions for promoting the reduction of corporate financing and consumer credit costs, further benefiting the real economy.

Compared with quantitative easing in other economies, China's statutory RRR is about 7 percent even after the latest cut, meaning there is still room for more cuts. The RRR cut at the beginning of the year reflects the forward-looking approach of the monetary authorities, and as a series of policies to stabilize growth, employment and prices take effect, positive factors will further accumulate to sustain China's economic recovery.

-Economic Daily