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Chinese Central Bank Moves to Help Economy

China’s central bank has taken steps to avoid the country’s economy from slowing down further in 2020. The People’s Bank of China has decided to let commercial banks operate with lower capital reserves.

What Does This Change Involve?

The idea is that banks in the country will now have a lower reserve requirement ratio (RRR). This figure was slashed by 50 basis points, bringing it down to 12.5%. The change is effective from the 6th of January, 2020.

What this means is that these banks will be able to lend more cash to their customers, rather than needing to keep it in reserve. In fact, it is expected that this change will free up a total of around 800 billion yuan (£87 billion) for new loans.

This is designed to help stimulate the economy. The general idea is that if people can borrow more then they will have more money to spend or to invest in their businesses. This should, therefore, help to boost the national economy. This isn’t the first RRR cut in recent times. 

During 2019, it was lowered three times, the last occurrence was in September. It was done in response to the slowing economy, badly affected by the country’s trade war with the US. This was also part of the reason for international commercial debt recovery becoming a key term in 2019. 

Why Was This Change Needed?

Despite the best efforts of the central bank, 2019 was a tough year for the Chinese economy. Growth dipped as low as it has been in the last 30 years, as the manufacturing industry shrank during long periods of the year.

This latest reduction was said to be designed to “further support the development of the real economy” as well as lowering the real financing costs. It could also prove useful in the build-up to the Chinese New Year, which is traditionally when cash is tight for individuals and businesses. 

Indeed, the central bank made a similar move last year, so this isn’t without precedents. The Chinese New Year holiday starts on the 25th of this month and is one of the country’s major holiday periods, with high levels of spending carried out. 

Yi Gang is the PBoC governor. He said that they had introduced a series of “resolute and strong actions” in the last year. Gang talked about the need to deal with “black swan” and “grey rhino” incidents in the market. 

A Look at the Future

This latest move suggests that the Chinese central bank is still worried about the future of their economy. It isn’t a huge figure at play, giving the mammoth size of the country’s economy. However, it does suggest that they are on the look-out for the slowdown continuing in the New Year. 

This is important on a global basis, as any negative moves in the Chinese economy affect other economies around the world. Lower demand from the Asian giant has been given as one of the reasons why the German economy had such a tough time in 2019.