24 November | Macroeconomics

China ramps up monetary stimulus as economic outlook worsens

A statement from China's State Council — China's Cabinet — was released on Wednesday, saying that financial instruments will be used in a timely and appropriate manner to maintain a reasonable level of liquidity. In addition, the State Council called for active financing of bonds of private organizations. Such a measure is intended to help real estate developers, who are now severely cash-strapped.

Reduction of the RRR — reserve requirement ratio — is usually introduced by the People's Bank of China within days of such statements by the Cabinet. The last such cut was made in April, amounting to 25 basis points for most banks. At that time, the reduction was less than economists had predicted.

As Covid cases reach record levels and cities tighten restrictions to combat the spread of the virus, China's economic outlook is worsening. Despite attempts by officials to make changes to Covid Zero policies to reduce the damage to the state's economy and social sphere, there has been a recent spike in the cases in Beijing, Chongqing and Guangzhou.

Economists at Goldman Sachs Group Inc. said the People's Bank could also implement targeted interest rate cuts for banks to further reduce the cost of financing for small businesses. Economists said they believe China's State Council meeting is an attempt to stimulate economic growth in the country, which has slowed due to the imposition of Covid restrictions amid rising cases.

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