BEIJING (Reuters) - Having reduced the amount of reserves that lenders must hold just two months ago, China’s central bank could soon do it again to support a slowing economy and contain risks posed by corporate debt defaults, policy sources said.
A three-year deleveraging drive is making progress, but has also driven up borrowing costs and tightened credit, seen as a factor in some private defaults and hampering local government investment.
Weaker-than-expected activity data on Thursday, following other figures showing a sharp contraction in shadow banking activity, could help tilt the People’s Bank of China (PBOC) towards a slight easing, policy insiders said.
The PBOC’s decision not to follow this week’s U.S. Federal Reserve rate rise with even a symbolic rise - a break from its recent practice - signaled that some policy fine-tuning is in the offing, they said.
“Monetary policy could be slightly loosened under the ‘prudent and neutral’ stance, and such loosening should be targeted rather than across-the-board,” said a policy source who advises the government.
“There is room for cutting RRR (reserve requirement ratio) in the next 1-2 months as China’s economy faces downward pressure and also uncertainties from a trade war with the United States.”
In April, a month after nudging up short-term rates by 5 basis points, the PBOC unexpectedly cut the RRR by 100 basis points. That released about 1.3 trillion yuan ($202.7 billion), with 900 billion yuan used by big banks to repay medium-term lending facility (MLF) loans and 400 billion yuan for small banks to lend to small firms.
“Monetary policy is...