Beijing to unlock about 700 billion yuan liquidity with bank reserves cuts

China’s central bank will cut the amount of cash some lenders must hold as reserves, unlocking about 700 billion yuan (Dh396.63bn) of liquidity, as it seeks to control leverage and support smaller companies.

The required reserve ratio for some banks will drop by 0.5 percentage point, effective July 5, the People’s Bank of China said on its website yesterday. The aim is to support small and micro enterprises, and to further promote the debt-to-equity swap programme, according to the central bank.

The cut will apply to major state-run commercial banks, joint-stock commercial lenders, postal banks, city commercial lenders, rural banks and foreign banks.

PBOC is adjusting monetary policy at a time when China’s economy is showing signs of slowing amid an ongoing campaign to clean up the financial sector and worsening trade tensions with the United States, according to Bloomberg.

It will also ease a funding squeeze for lenders, which have to repay money borrowed from the central bank’s medium-term lending facility, put aside cash for the July tax season and upcoming quarterly regulatory checks.

The fund unlocked from the reserve ratio cut shouldn’t be used to support the so-called zombie companies, the PBOC said.

The combined 700bn yuan liquidity injection into the banking sector has exceeded the market anticipated 400bn yuan, according to Huatai Securities.

“The intensity of the move exceeded market expectations,” Wang Jun, Beijing-based chief economist at Zhongyuan Bank, told Reuters.

“This move will help support the real economy and stabilise financial markets. We’ve seen rising debt defaults and funding strains on small firms, as well as a sharp adjustment in the capital market.”