China applies further stimulus to support the economy through a reduction to its cash reserve requirement ratio which is expected to release 800 billion yuan of liquidity.
The People’s Bank of China announced a 50 basis point cut to the RRR – the eighth such reduction since early 2018 – in a move to offset the weakest growth seen in nearly 30 years. The RRR cut reduces the reserve level of big banks to 12.5 percent.
The cut was in line with expectations following Premier Li Keqiang’s speech in late December, according to a «Reuters» report, which underlined considerations for lowering financing costs of smaller companies including broad-based and targeted RRR restrictions. The latest 50 basis point cut will result in around 120 billion yuan ($17.2 billion) released to small and medium-sized banks which the PBoC stressed should be used to fund small, local businesses.
Cut Financing Costs
In addition to small business financing, PBoC said the lower RRR will also help reduce banks’ annual funding cost by 15 billion yuan ($2.2 billion) which could offset margin pressure from recent interest rates reforms. Most recently, the PBoC ordered that existing floating rate loans be converted to a new benchmark rate as of January 1 in order to reduce broader financing costs.
The RRR cut also occurs ahead of the Lunar New Year holidays in China and the PBoC highlighted that total liquidity would remain stable ahead of the period which typically yields greater demand for cash and higher credit crunch risks.
