The People’s Bank of China, China’s central bank, announced this week that they would reduce the current reserve requirement ratio (RRR) to just over 8.4%.
A reduction in RRR will allow banks to hold less of their deposits as reserves, thus creating more funds which can then be lent out to businesses and individuals. In total, the RRR cut is expected to inject around $188 billion into the Chinese economy.
This use of monetary policy by the central government is an attempt to boost aggregate demand at a time when the Chinese economy is showing signs of slowing down. Despite the impressive resurgence of the Chinese economy after the initial impact of the pandemic, the economy is losing momentum in the face of more Covid-19 outbreaks, a looming debt crisis in the real-estate market, and a weak manufacturing sector.
Chinese government officials hope the monetary intervention will stimulate growth in the economy and be especially beneficial to financing small firms.
THINK LIKE AN ECONOMIST!
Q1. What is meant by the term monetary policy?
Q2. Explain why economic growth in China is slowing down.
Q3. Evaluate the impact that this form of monetary policy is likely to have on increasing aggregate demand in the Chinese economy.
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