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April 6, 2020

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PBOC cuts RRR in bid to stimulate economy

CHINA’S central bank on Friday announced a decision to cut the reserve requirement ratio for small and medium-sized banks by 100 basis points in its latest effort to bolster the real economy amid the novel coronavirus outbreak.

The RRR cuts will be implemented in two phases, with the first of 50 basis-point reductions expected on April 15.

The second, also 50 basis points, will be effective on May 15, said the People’s Bank of China.

The reduction in the cash that lenders must hold as reserves is expected to unleash around 400 billion yuan (US$56.3 billion) of long-term capital into the market, the PBOC said.

The cuts are expected to inject liquidity into around 4,000 small and medium-sized lenders including rural cooperatives, rural commercial banks and city commercial banks operating only within provincial administrative areas, adding sources of stable financing for the country’s small and medium-sized enterprises.

Better use of capital

After the cuts, the RRR for the country’s small and medium-sized lenders will be slashed to 6 percent, a relatively low level compared with the ratio in other developing countries and past rates in China.

The PBOC will also cut the interest rate on excess reserves for financial institutions from 0.72 percent to 0.35 percent from tomorrow, the first cut since 2008.

The move will push banks to enhance their capital use efficiency and help them better serve the real economy, especially SMEs.

Friday’s decision marked the third RRR cuts the central bank has announced this year to shore up the economy, which was under significant downward pressure as a result of the novel coronavirus disease.

The previous cuts, announced on January 1 and March 13, released a total of 1.35 trillion yuan of liquidity into the market.

The high frequency of RRR cuts marked continued government efforts in counter-cyclical adjustments, while at the same time reflecting the urgency in driving economic recovery amid epidemic control, said Wen Bin, chief researcher with China Minsheng Bank, in a research note.

China has been resorting to a package of monetary and fiscal policies to support the country’s SMEs, which were hardest hit by COVID-19.


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