Freeing Reserve Cash
China further cuts the reserve requirement ratio for banks to boost the real economy
On October 15, the reserve requirement ratio (RRR) for most banks in China went down by 1 percentage point, the fourth such cut in 2018. The People’s Bank of China (PBC), the country’s central bank, announced the decision on October 7, saying the measure is mainly aimed at optimizing the structure of liquidity in commercial banks and the financial market so that the financial sector can better serve the real economy.
Some of the liquidity unleashed by the reduction was used to pay back 450 billion yuan ($65.22 billion) of medium-term lending facility (MLF) due on October 15. In addition, the RRR cut also released another 750 billion yuan ($108.7 billion) of incremental capital, according to PBC statistics.
The cut applied to the renminbi deposits of large commercial banks, joint-stock commercial banks, city commercial banks, noncounty rural commercial banks as well as foreign-funded banks.
Serving real economy better
As more credit is granted, financial institutions’ demand for medium- and long-term liquidity is also increasing. Moderately cutting the reserve requirement, the amount of deposits that a bank must keep on hand at all times, has stabilized funds within the banking system. Besides improving the liquidity structure in commercial banks and the financial market, it will also allow financial institutions to access long-term funds steadily and subsequently reduce corporations’ financing costs.
The 750-billion-yuan incremental capital to be freed will enable financial institutions to better support small and micro-sized enterprises, private companies and innovation-driven firms. All this will enhance the innovative vigor and resilience of the economy and boost sound development of the real economy, said a PBC statement on the RRR cut.
“This time of RRR reduction conforms to the changes in the Chinese economy,” Lian Ping, chief economist of Bank of