China will cut banks' reserve requirements, taxes: Premier Li

China will cut banks' reserve requirements, taxes: Premier Li

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.

China's economic growth appears to be slowing faster-than-expected amid escalating risks of a synchronized global slowdown, with manufacturing activity contracting in December for the first time in more than two years.

But tighter liquidity conditions are possible before the Spring Festival in early February, they said, which requires proper liquidity operations from the central bank to prevent volatility and maintain lower market interest rates.

"The old playbook of China's economy seems to be back", said Shao Yu, chief economist at Orient Securities in Shanghai.

The reduction is being made in two equal stages, effective January 15 and January 25, the PBOC said. The size of the move was on the upper end of market expectations, and the net funds released would be the largest amount in the five cuts since last January.

On Wednesday, the PBOC changed the definition of a small business, meaning an enterprise with a credit line of less than 10 million yuan will qualify for targeted RRR cuts, up from the previous standard of 5 million yuan.

Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed the economy was continuing to lose steam amid increased signs of a pinch from the trade war with the United States.

"Looking ahead, China's key policy challenge is to manage trade-related headwinds while maintaining efforts to limit financial risks", the bank said its latest assessment on the world's second-largest economy.

Economists believe the government could take more fiscal steps by cutting taxes and boosting spending on infrastructure, amid expectations that the budget deficit ratio could be lifted to 3 percent in 2019 from 2.6 percent past year.

This will allow banks to lend more capital to enterprises now classed as small businesses, and therefore free up more reserves from the central bank, with estimates ranging from 400 billion yuan to as much as 700 billion yuan.

"The Chinese economy continues healthy development and stays within a reasonable range", it said.

China's economy grew at an annualized rate of 6.5 percent in the July-September period of 2018.

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