China may cut reserve ratio with $625-billion liquidity hole

16 2018 shows a traffic jam at a crossroad in the city centre of Beijing at night

Image People's Bank of China acts to support economic growth

Liao Zhiming, an analyst at Tianfeng Securities, expects the move will release about 600 to 700 billion yuan in liquidity.

China's central bank said on Friday it was cutting the ratio of cash that banks must hold as reserves by 100 basis points (bps), or 1 percent, as it looks to reduce the risk of a sharper slowdown in the world's second-biggest economy.

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.

In the first three quarters of past year, total new loans to micro and small companies stood at 1.48 trillion yuan, which only took up 22.4 percent of the total growth in corporate loans.

"It is hard to clearly understand the overall policy effect as every institution has to make their own calculations", said Ding Shuang, chief Greater China economist at Standard Chartered Bank.

The cuts will be effective January 15 and January 25, and come ahead of the long Lunar New Year celebrations when cash conditions often get tight.

The monetary policy transmission mechanisms will be further smoothed out while the proportion of direct financing will be increased to make financing more accessible and affordable for the private sector and small businesses, according to a statement issued after the meeting.

China cut the amount of cash banks need to set aside as reserves four times previous year as the nation struggled with slower economic growth, record corporate bond defaults and a trade war with the US.

China's leadership has emphasised the need to "stabilise" growth and employment in 2019, and the central bank is a key institution to achieve this.

Ding from Standard Chartered Bank, who previously worked for the International Monetary Fund, said such "targeted" tweaks may become the new standard for PBOC in 2019 under a "prudent" monetary policy stance.

At the same time, the central bank's move is still seen a good news for lenders and the broad economy as liquidity is tightening before the Lunar New Year holiday. 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. And its major function is to encourage commercial banks' leading to small and micro companies, which are usually in high demand of credit, according to analysts.

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