The People’s Bank of China cut the amount of cash banks must hold in reserve for the second time this year.
The move is an effort to boost flagging economic growth in China. The bank could have cut its benchmark interest rate in pursuit of the same goal. But that would have led to more selling against the yuan and the People’s Bank has been busy in the trenches in recent weeks trying to prop up the yuan agains the dollar.
The question, of course, is whether the cut in reserve requirements will be enough, without a reduction in interest rates, to revive growth in China’s economy.
The People’s Bank of lowered the reserve requirement ratio for most banks by 25 basis points, according to a statement Thursday. The weighted average reserve requirement for banks will be 7.4% after the reduction. The cut will help maintain “reasonably ample” liquidity in the banking system, the People’s Bank said in a statement. The reduction could free up 450-500 billion yuan ($55-69 billion) for new loans, according to Pantheon.
A big portion of that new lending will go local government bond that issuance, have been rushing to issue their quota of so-called “special” bonds used mainly to finance infrastructure projects before a September deadline. Provincial governments sold the biggest amount of special bonds in more than a year in August, according to Bloomberg calculations.
One problem: the evidence suggests that the kind of big infrastructure project that used to boost growth have been less effective and more wasteful. Building more apartments that then sit empty, for example, doesn’t have strong multiplier effect that would boost growth across the economy.
And China’s economy could certainly use a boost. China’s post-Covid recovery has been losing momentum since a rebound in the first quarter, with July data showing a large drop in property sales and slower consumer spending. The government set a fairly conservative economic growth target of around 5% for this year.
On Friday investors will get new data that might show the China’s economy is starting to rebound.
China’s economic activity likely improved in August, adding to a steady drip of clues that suggest The peak summer holiday season drove a boom in spending on travel and hotels. Manufacturers reported an expansion in new orders for the first time in five months. A rush to sell more special local bonds to fund infrastructure projects aided construction. Figures for retail sales and industrial production are expected to show year-on-year growth in August outstripping the previous month’s pace.
Convicning evidence that China’s economy has bottomed would be a big boost to global market looking for growth anywhere. Positive numbers would be especially beneficial to commodities prices. I’d keep on eye on copper prices and copper stocks to see if markets have turned toward optimism on China. One stock I’d watch in particular is Southern Copper (SCCO). The shares pay a dividend of almost 5%. They are up 35% for 2023 as of the close on September 13 but down 5% in the last month. I already own the shares in my online portfolio but I’ll be looking to add to positions on the Friday news from China.
