[China's Easing vs Tightening] "Economy Could Collapse More"... Hurried Reserve Requirement Ratio Cut

Reserve Requirement Ratio Reduced by 0.25%p as of December 5
Expansion of Real Estate Development Credit Limits for Banks

[Image source=Yonhap News]

[Asia Economy Beijing=Special Correspondent Kim Hyunjung] As economic conditions worsened due to zero-COVID prevention measures, Chinese financial authorities have taken a more aggressive stance on 'liquidity injection.' This is interpreted as an effort to support the economy as much as possible through boosting the real estate market and consumption. However, even internal experts say that the core issue lies in the COVID-19 situation and prevention measures, and they predict that without full reopening, a recession is inevitable.

On the 25th, the People's Bank of China, the central bank, announced that it would lower the reserve requirement ratio (RRR) by 0.25 percentage points (p) effective December 5. This RRR cut is expected to inject 500 billion yuan (approximately 92.8 trillion won) of long-term liquidity. After the cut, the average RRR in China's financial sector will drop to 7.8%. Since January 2020, China has lowered the RRR seven times in total to mitigate the impact of COVID-19. Lowering the RRR reduces the cash ratio that commercial banks must hold as mandatory reserves, thereby increasing the funds available in the market.

The main purpose of lowering the RRR is to 'inject liquidity.' Economic activities have been severely restricted due to zero-COVID prevention measures, and liquidity flow began to deteriorate as even the real estate market, which accounts for a significant portion of the Chinese economy, fell into recession.

This has already been confirmed by weak consumption. In October, China's retail sales growth rate decreased by 0.5% year-on-year, worsening compared to the previous month's (2.50%) increase. The GDP growth rate, which was around 4.8% in the first quarter, plunged to 0.4% in the second quarter, rebounded to 3.9% in the third quarter, but faces a high possibility of falling again due to the adverse effects of renewed COVID-19 outbreaks at the end of the year.

On the 24th, measures to further accelerate liquidity injection into the real estate market by banks were implemented. The Industrial and Commercial Bank of China, the largest local bank, announced on the same day that it would expand credit limits by a total of 655 billion yuan to 12 real estate developers. According to local economic media Caixin, from January to October this year, real estate development loans executed by the banking sector reached 2.64 trillion yuan, and mortgage loans were about 4.84 trillion yuan. On the 11th, the People's Bank of China and the China Banking and Insurance Regulatory Commission also announced 16 measures aimed at overcoming the real estate crisis, including extending the repayment periods for corporate bank loans and bonds.

[Image source=Yonhap News]

However, even among prominent economists, voices are emerging that the fundamental remedy for China's economic normalization lies in ending the COVID-19 chaos and reopening. Wang Yiming, Vice Chairman of the China Center for International Economic Exchanges, stated at an event hosted by the Hong Kong Institute for Monetary and Financial Research the day before, "To avoid a dangerous situation where growth slows and the country can no longer generate economic momentum or become prosperous, it is crucial to improve productivity and revitalize the market." He added, "This cannot be achieved by simple counter-cyclical adjustment policies," emphasizing that "reforms and opening-up must be deepened."

Earlier, at the 'Caixin Summit' held by local economic media Caixin in Beijing on the 20th, Liu Shijin, a monetary policy committee member of the People's Bank of China, argued that next year's GDP growth rate should be set above 5%, stating, "The top priority now is to return the macroeconomy to a normal track."

Meanwhile, China's third-quarter economic growth rate recorded 3.9% year-on-year, rebounding from 0.4% growth in the second quarter. However, the growth rate for the first to third quarters was only 3%, significantly below the Chinese government's initial target of 5.5%. The International Monetary Fund (IMF) recently lowered its GDP growth forecasts for China to 3.2% in 2022 and 4.4% in 2023 in its World Economic Outlook.