China Cuts Reserve Requirement Ratio

China’s central bank reduced the reserve requirement ratio for banks for the fourth time this year to cut financing costs and prop up economic activity.

In a statement released Sunday, the People’s Bank of China said that it will reduce the ratio of cash that banks should retain as reserves by 100 basis points, with effect from October 15.

The latest 1 percentage point cut is set to release $175 billion.

The bank reiterated that it will continue to implement prudent and neutral monetary policy. The reduction will not lead to currency depreciation, the bank added.

While the RRR cut leaves little doubt that policymakers’ top priority is supporting the economy, they are still trying to strike a balance with their other competing policy goals of deleveraging and exchange rate stability, Julian Evans-Pritchard, an economist at Capital Economics, said.

The economist said PBoC’s tolerance for depreciation may increase if the economy weakens more than anticipated or if trade tensions with the US escalate further.

But for now at least, the PBoC still appears to be intervening to prevent the renminbi from reaching 7.00 against the US dollar, the economist added.

In September, the Asian Development Bank forecast China to grow 6.6 percent in 2018, before slowing to 6.3 percent next year, citing lower demand growth and the risk of escalating trade tensions.

The economy had expanded 6.7 percent in the second quarter. The third quarter GDP data is due on October 19.

According to the Purchasing Managers’ survey, the private sector logged a moderate growth in September as improved services activity was offset by softer manufacturing growth.

China’s foreign exchange reserves decreased $22.7 billion to $3.09 trillion in September, the PBoC said in a separate communiqué on Sunday.

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