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Expectations Of A Reduction In The Reserve Ratio In China

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State-owned media quoted a former governor of the People’s Bank of China as saying on Sunday that China is likely to implement a proactive fiscal policy next year, as the need for the world’s second-largest economy to achieve stable growth persists. This comment comes at a time when the economy is struggling to gain momentum after stumbling due to prolonged pandemic control measures, while market observers fear that the severe debt crisis among major real estate developers may extend to other sectors.

Sheng Songcheng, former director of statistics and analysis, stated, “It is expected that China will continue to implement a positive fiscal policy next year, along with monetary policies that align with the positive fiscal policy, with relatively large policy space to reduce reserve requirements.” These remarks were reported by Shanghai Securities News, citing the People’s Bank of China.

Sheng also mentioned that with interest rates and benchmark lending rates at low levels, there is greater room to reduce the reserve requirement ratio (RRR) for banks rather than lowering interest rates. The central bank lowered the required reserve ratio in September for the second time this year to boost liquidity and support economic recovery. Analysts expect another reduction by the end of the year.

The weighted average reserve requirement ratio for financial institutions is around 7.4% after the reduction. Sheng stated that China is cautious about lowering interest rates because its monetary policy needs to consider both domestic and external balances. “The interest rate differential between China and the United States is expected to stabilize, so the yuan is likely to maintain a moderate upward trend, but the increase is limited.”

e United States is expected to stabilize, so the yuan is likely to maintain a moderate upward trend, but the increase is limited.”

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