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October 8, 2018

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PBOC slashes reserve ratio for fourth time

CHINA’S central bank yesterday announced a cut in the amount of cash that banks must hold as reserves to lower the financing cost for the country’s real economy.

The People’s Bank of China said it will reduce the reserve requirement ratio by 100 basis points, effective from October 15.

The fourth cut of this year will cover the yuan deposits of large commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks and foreign banks.

The cut in reserve requirement ratios — currently 15.5 percent for large commercial lenders and 13.5 percent for smaller banks — will release a total of 1.2 trillion yuan (US$175 billion) in liquidity.

A statement of the central bank said some of the liquidity unleashed will be used to pay back the 450 billion yuan of the medium-term lending facility (MLF) that will mature on October 15.

The MLF is a liquidity tool introduced by the PBOC in 2014 in an aim to help the commercial and policy banks maintain liquidity by allowing them to borrow from the central bank by using securities as collateral.

This is the second time that the central bank has used reserve requirement cuts to replace MLF operation this year.

Wu Qing, chief economist of the China Orient Asset Management Co, said the move was consistent with market expectations, and in the future, the central bank might continue to use MLF and other tools to make fine adjustments on liquidity.

According to the central bank, the incremental capital of 750 billion yuan will be injected into the market to support small, micro and private enterprises, and innovative companies to enhance the vitality and resilience of the world’s second-largest economy, strengthen endogenous growth momentum and promote the healthy development of the real economy.

The move remains targeted at adjustment with a goal to optimize the liquidity structure of commercial banks and the financial market and to reduce financing costs, said the central bank.

The PBOC will continuously implement a prudent and neutral monetary policy, refrain from using a deluge of stimulus and focus on targeted adjustment to maintain sound and sufficient liquidity, facilitate rational growth in monetary credit and social financing, and create a proper monetary and financial environment for the country to pursue high-quality economic development and advance the supply-side structural reform, it said.

The move will fill in the liquidity gap of banks and put no downward pressure on the yuan as the country’s monetary policy is not eased, according to the PBOC statement.

There are sufficient conditions for the yuan exchange rate to remain stable at a reasonable and balanced level, it said.

“The PBOC will continue to take necessary measures to stabilize market expectations and keep the foreign exchange market running smoothly,” it said.

Dong Ximiao, a researcher with the Chongyang Institute for Financial Studies of the Renmin University of China, noted that the steadily growing Chinese economy also faced challenges.

Apart from ensuring reasonably sufficient liquidity, the government could also use fiscal and taxation policies to stimulate growth and enhance economic sustainability, Dong said.


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