Trim in banks’ RRR set to unleash potentially US$160b in liquidity
Print Edition
CHINA will cut the reserve requirement ratio for banks today, potentially freeing up nearly 1 trillion yuan (US$160 billion) in liquidity, as the government seeks to boost the domestic economy.
All banks can now put aside less cash as reserves with the People’s Bank of China after the central bank yesterday announced a broad RRR cut by 0.5 percentage points, effective from today.
An extra 0.5-percentage-point cut is granted for certain commercial banks heavily engaged with small businesses, the farming sector and major water projects to boost the extremely weak areas of the economy, the PBOC said in a statement yesterday.
The banks eligible for the extra lower ratio were not named.
The Agricultural Development Bank of China, the sole policy lender for agriculture, got a 4-percentage-point cut.
Except for the specially treated banks, big banks are now required to hold 19.5 percent of their deposits as reserves while the ratio for smaller banks is 16 percent.
The cuts will free up between 700 billion yuan and 900 billion yuan in liquidity from banks, allowing more funds to flow into the economy, said Luo Yi, chief analyst of Huatai Securities.
The cut was widely expected after the PBOC unveiled a surprise reduction in benchmark interest rates in November to lift the Chinese economy from a protracted slowdown.
Data released on Sunday showed the purchasing managers’ index, a main gauge of manufacturing activity, fell below the 50-point mark to indicate a contraction for the first time since October 2012.
Lu Zhengwei, chief economist of the Industrial Bank, said the cut is a response to the lower-than-expected manufacturing data, and could cause the yuan to depreciate, but it will benefit China by giving a boost to exports and reducing debts.
“The liquidity released by the RRR cut could guide financing costs lower, adding pressure on the yuan’s valuation,” said Lu. “Easier monetary policies together with a depreciating local currency could help stabilize the Chinese economy.”
Also yesterday, the PBOC’s Shanghai headquarters said it will seek a stable credit growth and reform interest rates in the free trade zone this year.
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