Dividends and China frees up billions for banks to underpin slowing economy

The lifeblood of every economy around the world is credit. Who has access to it and who does not. The government needs banks and one of the most important banking regulations is the reserve requirements. The banks of every country need to maintain a level of liquidity versus the number of loans they have outstanding and can lend. In times of recession, the reserve tends to be higher, in times of booming economy the reserve tends to be less, the rest of the time the government departments are trying to do a balancing act.

In an article by Ellen Zhang and Kevin Yao of Reuters, the Central Bank of China is cutting the amount of cash that banks must hold as reserves for the second time this year which has the effect of releasing $93.3 billion in long term liquidity.

The idea is banks would lend more money or offer more options to businesses which are struggling because of lock downs imposed by the government. The issue is having more money to lend does not necessarily mean more money is lent.

The cut by the Central Bank will lower the weighted average ratio for financial institutions to 7.8% and will affect all banks except those implementing a 5% reserve ratio, while lowering banks’ annual funding costs by $1.1 billion.

Linking to dividend paying stocks, all economies that are market driven are similar in terms of loans are given out, loans are repaid, and the leverage means the economy functions. In order to see how the economy is doing, seeing what the reserve requirements from the Central Bank to the banks is a good indication of how things are really going. For your investments, you need to know what government regulations help and hurt your investments, which is why every week the government issue reports which tells you the big picture and you can distill it to your investments.

There are more questions than answers, till the next time – to raising questions.

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