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January 2, 2020

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PBOC lowers reserve requirements

CHINA’S central bank said yesterday it was cutting the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan (US$114.91 billion) in funds to shore up the real economy.

The People’s Bank of China said it will cut banks’ reserve requirement ratio by 50 basis points, effective on January 6.

This is to support the development of the real economy as well as to reduce social financing costs, according to a PBOC statement on its website.

The central bank said the cut is an across-the-board reduction reflecting counter-cyclical adjustment.

Currently, the required reserve ratio is 13 percent for large financial institutions and 11 percent for smaller ones.

In the comprehensive lowering of the reserve requirements, small and medium-sized banks such as urban commercial banks operating exclusively within province-level regions, rural commercial banks serving counties, rural cooperative banks, rural credit cooperatives and village banks will receive long-term funds of more than 120 billion yuan.

At the same time, capital costs for banks will be cut by about 15 billion yuan a year. This can lead to a reduction in the real cost of social financing, especially the financing costs for micro and private enterprises, according to a PBOC official.

The ratio cut will offset the large amount of cash drawn from banks before Spring Festival, thus maintaining the stability of the overall liquidity of the banking system, the bank noted. “The prudent monetary policy stance remains unchanged.”

Spring Festival

The move is in line with market expectations, as many analysts had predicted that the bank would increase funding to the financial system around the New Year.

Wen Bin, chief analyst at China Minsheng Bank, said around 600 billion yuan of reverse repos is due to expire in the first half of January.

And demand for funds will be under pressure in the run up to the Spring Festival. Enterprises’ tax payment, banks’ reserve payment and the issuance of local government bonds will all put pressure on liquidity, thus cutting the reserve requirement ratio is a way to enable market liquidity to remain reasonable and adequate.

Wen expected that the medium-term lending facility will remained unchanged in January, while the one-year loan prime rate on January 20 could fall from 4.15 percent to 4.1 percent and the five-year rate could also decline from 4.8 percent to 4.75 percent.

The State Council said in a guideline on December 24 that supportive fiscal policies to reduce enterprises’ social security burdens would be extended for another year. Financial support will also be stepped up for private, micro and small firms.

On December 23, Premier Li Keqiang stressed the need to foster a new economy and new growth engines by encouraging entrepreneurship and innovation. He promised to grant stronger support to small and medium-sized banks, as reported by CCTV.

“The government will carry out further research into the use of multiple tools including the reserve requirement ratio, re-lending and re-discounts to cut real interest rates and financing costs to ease the financing difficulties of small and micro-businesses,” Li said.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend.




 

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