China sees room to lower reserve requirement ratio, says CB official

China still sees some room to lower the amount of cash banks must hold as reserves, a central bank official said, adding that the lender will continue to implement policies to support the economic recovery.

“The reserve requirement ratio (RRR) cut at the beginning of this year is still showing its effect,” said Zou Lan, head of the People’s Bank of China’s (PBOC) monetary policy department, at media conference in Beijing.

The average reserve requirement ratio for financial institutions is around 7 per cent at present, “so there is some room,” he added.

The PBOC made a 50 bps RRR cut for all banks that took effect on Feb. 5 to support a fragile economic recovery. But indicators showed China’s economy grew much slower than expected in the second quarter, dragged by a protracted property downturn and weak domestic demand.

Zou said that narrowing banks’ net interest margins would constrain any further cuts in the deposit and lending rates, adding the central bank will reasonably set the strength and pace of policy adjustments based on the economic recovery.

Goldman Sachs on Thursday expected the PBOC to deliver a 25-bps RRR cut in September and a 10-bps policy rate cut in the fourth quarter.

An official survey on Saturday showed China’s sprawling manufacturing activity sank to a six-month low in August, pressuring policymakers to press on with plans to direct more stimulus to households.

China’s central bank held back on buying gold for its reserves for a fourth straight month in August, official data showed on Saturday.

China’s gold holdings stood at 72.8 million fine troy ounces at the end of last month. The value of the gold reserves, however, rose to $182.98 billion compared with $176.64 billion at the end of July.

Gold prices have been rising this year amid bets that US rate cuts are imminent and due to safe-haven demand driven by geopolitical and economic uncertainty, with central banks making robust purchases.

Gold prices have surged 21 per cent so far this year and are hovering slightly below a record high of $2,531.60 hit on Aug. 20.

Prior to the pause in its purchases, the People’s Bank of China (PBOC) had bought gold for 18 consecutive months.

The central bank was the world’s largest single buyer of gold in 2023 and its decision to put its buying on hold has helped mute Chinese investor demand in recent months.

The PBOC is expected to resume purchases at some point despite high prices due to political, rather than economical, motivations, such as its desire to be less dependent on the US dollar as a reserve asset, said Carsten Menke, an analyst at Julius Baer.

China’s foreign exchange reserves rose to the highest level in more than 8-1/2 years in August, official data showed on Saturday, thanks largely to a broadly weaker US dollar.

The country’s foreign exchange reserves - the world’s largest - grew by $31.8 billion to $3.288 trillion last month, booking the second straight monthly expansion and hitting the highest since December 2015.

But it slightly missed a $3.289 trillion forecast in a Reuters poll of analysts.

The yuan gained 1.9 per cent against the dollar in August, while the dollar last month weakened 2.2 per cent against a basket of other major currencies.

China’s former central bank governor Yi Gang said on Friday the country should focus on fighting deflationary pressure as the world’s second-biggest economy struggles to lift-off despite a raft of policy support measures.

Yi’s comments came as businesses squeezed profit margins and employees suffered paycuts in the $18 trillion economy, as a property crisis and weak domestic demand weighed on investor and consumer sentiment.

“I think right now they should focus on fighting the deflationary pressure. If you look at nominal GDP, it’s positive, but you also need to look at people’s income and tax revenue,” said Yi, deputy head of the economic committee of the Chinese People’s Political Consultative Conference (CPPCC), at the Bund Summit in Shanghai.

China’s economy expanded 5.0 per cent in the first half of 2024 but growth momentum has waned since the second quarter.

“The key word is how to improve domestic demand and how they can deal with the situation of the real estate market as well as local government debt,” Yi said, adding that what is important for people is their employment future and income prospects.

The jobless rate for 16- to 24-year olds in China, excluding students, rose to 17.1 per cent in July from 13.2 per cent in the prior month.

“Overall we have the problem of weak domestic demand, especially on the consumption and investment sides, so that needs proactive fiscal policy and accommodative monetary policy,” Yi said.