China’s central bank said on Sunday it would cut the amount of cash that some banks must hold as reserves by 50 basis points (bps), releasing $108 billion in liquidity, to accelerate the pace of debt-for-equity swaps and spur lending to smaller firms.
The reserve reduction, the third by the central bank this year, had been widely anticipated by investors amid concerns over market liquidity and a potential economic drag from a trade dispute with the U.S.
Bigger than expected
But the 700 billion yuan ($107.65 billion) in liquidity that the central bank said will result from the reduction in reserves was bigger than expected.
Expectations of a cut had risen after the State Council, or cabinet, said on Wednesday monetary policy tools including targeted cuts in banks’ reserve requirement ratios will be deployed to strengthen credit flows to small firms and keep economic growth in a reasonable range.
Economists are not ruling out further reserve requirement reductions for the rest of the year as borrowing costs rise due to Beijing’s clamp-down on leverage in the financial system, a campaign now in its third year, while uncertainty over Sino-U.S. trade ties persists.
The People’s Bank of China (PBOC) said that the latest targeted cut in some banks’ reserve requirement ratios (RRRs) - currently 16% for large banks and 14% for smaller banks - will take effect on July 5.
The PBOC said the cut will release about 500 billion yuan ($77 billion) for the country’s five large state banks and 12 national joint-stock commercial banks. Lenders are encouraged to use the money to conduct debt-for-equity swaps.
