The People’s Bank of China (PBoC) is planning to pump about $115 billion into the economy by freeing up lenders to write more loans, The New York Times reported on Wednesday (Jan. 1).
China’s central bank said it would cut its reserve requirement ratio – the amount of cash from deposits that lenders must have on-hand – by 0.5 percent up to 12.5 percent for large banks, effective Jan. 6, per reports.
The demand for cash increases for China’s Lunar New Year holiday, which starts on Jan. 25 this year. Last year at this time, the central bank made a similar cut.
Leaders in China are grappling with the most sluggish economy in almost 30 years, a slowdown that almost triggered a German recession. Africa, Latin America and the rest of Asia are also suffering due to China’s economy.
This latest announcement followed the fourth-quarter meeting of the PBoC’s monetary policy committee on Dec. 27. It also comes ahead of Beijing’s release of year-end growth estimates.
The bank said at the meeting that increases in credit lines would align with nominal GDP growth, the South China Morning Post reported. Funding costs would also align with the economic contributions made by private companies, which generally make up about 60 percent of China’s GDP. Private firms are also responsible for about half of tax revenues and 90 percent of employment.
The Chinese economy, which is the world’s second-largest, has been “facing external and domestic headwinds,” in part due to the 18-month trade war between the U.S. and China. Third-quarter growth in China was 6 percent, its lowest since 1992.
Chinese banks are also easing loan requirements in an attempt to stimulate a stalled economy and fulfill the government’s goal to increase small business lending by 30 percent.
Although loans in that sector can be dicey and are prone to higher defaults, Beijing is determined to boost China’s economy, although skeptics worry that making risky loans could have the opposite effect.