China cuts banks’ reserve ratios, frees up $115bn

China cuts banks’ reserve ratios, frees up $115bn
The People’s Bank of China has cut reserve requirements to free up more funds for lending as economic growth slows. (Reuters)
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Updated 01 January 2020

China cuts banks’ reserve ratios, frees up $115bn

China cuts banks’ reserve ratios, frees up $115bn
  • PBOC frees up more funds to spur lending

BEIJING: China’s central bank said that it was cutting the amount of cash that all banks must hold as reserves, releasing about 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy.

The People’s Bank of China (PBOC) said on its website that it will cut banks’ reserve requirement ratio (RRR) by 50 basis points, effective Jan. 6. The move would bring the level for big banks down to 12.5 percent.

The PBOC has now cut RRR eight times since early 2018 to free up more funds for banks to lend as economic growth slows to the weakest pace in nearly 30 years.Many investors had expected Beijing to announce more support measures soon. 

While recent data has shown signs of improvement, and Beijing and Washington have agreed to de-escalate their trade war, analysts are unsure if either will prove sustainable and forecast growth will cool further this year.

“The RRR cut will help boost investor confidence and support the economy, which is gradually steadying,” said Wen Bin, an economist at Minsheng Bank in Beijing, who also expects another cut in China’s new loan prime rate (LPR) this month.

Premier Li Keqiang raised expectations of an imminent RRR cut in a speech in late December, saying authorities were considering more measures to lower financing costs for smaller companies, including broad-based and “targeted” RRR reductions aimed at helping more vulnerable parts of the economy.

Freeing up more liquidity now would also reduce the risks of a credit crunch ahead of the long Lunar New Year holidays later this month, when demand for cash surges. 

Record debt defaults and problems at some smaller banks have already added to strains on China’s financial system.

The PBOC said that it expects total liquidity in the banking system to remain stable ahead of the Lunar New Year.

Of the latest funds released, small and medium banks would receive roughly 120 billion yuan, the central bank said, stressing that it should be used to fund small, local businesses.

The PBOC said that lower reserve requirements will reduce banks’ annual funding costs by 15 billion yuan, which could reduce pressure on their profit margins from recent interest rate reforms.

Last week, it said that existing floating-rate loans will be switched to the new benchmark rate starting from Jan. 1 as part of a broader effort to lower financing costs.