China signals reduction in reserve requirements ratio to support recovery

China signals reduction in reserve requirements ratio to support recovery

Monetary tool to be used when needed to keep liquidity reasonably adequate.

A woman shows the banknotes and coins included in the 2019 edition of the fifth series of the Renminbi. PHOTO XINHUA China signaled a reduction in the reserve requirement ratio to increase the ability to expand credit for the purpose of supporting economic recovery and stabilizing market confidence, according to experts.

Monetary policy tools such as RRR cuts could be used when needed and as appropriate to keep liquidity reasonably adequate, according to a decision made by the State Council executive meeting on Tuesday. The state council is the nation's cabinet.

The decision was triggered by several factors, including the economic recovery pressure China is facing due to the sporadic outbreaks of COVID 19 and the narrowing of banks' net interest margins, and the need for long-term liquidity to stabilize the housing market, said Lou Feipeng, senior economist at Postal Savings Bank of China.

Lou said the People's Bank of China may reduce the RRR for all banks by 0.25 percentage points. A reduction in cash amount banks must hold in reserve is expected to free up about 550 billion yuan $77 billion in long-term liquidity.

China will not only encourage banks to increase support for the real economy, but also lower their borrowing costs, helping banks to surrender part of their profits to support the real economy by using RRR cuts. He said that the reduction is favourable for banks to provide long-term financing for the economy because of the long-term funds freed by the reduction.

The recovery of the real economy has been affected by the resurgence of COVID 19 cases in a number of Chinese cities this month, according to Wang Yunjin, senior researcher at the Zhixin Investment Research Institute.

It is necessary for China to take measures like cutting the RRR to send a positive signal to the economy, maintain market stability and create a favorable financial environment for economic stabilization and recovery, as demand is still insufficient and market sentiment is unstable.

Market liquidity needs to be tightened and that needs to be tightened further. The country was able to issuance of special bonds for local government in October and November. Demand for supporting financing will increase with the implementation of infrastructure investment projects. He said that the banking system needs to maintain sufficient liquidity because of the loosening of a series of real estate policies.

China has little room for a decrease in market interest rates because major developed countries are still raising their interest rates, despite the fact that major developed countries are still raising their interest rates. He said that lowering the RRR is a more suitable choice among monetary policy instruments than lowering the RRR.

Financial institutions that have already implemented a 5 percent RRR have been cut by the PBOC by 0.25 percentage points on April 25, except for the financial institutions that have already implemented a 5 percent RRR.

The gap between the balance of bank deposits and the balance of bank loans widened at the end of September, according to a report by the PBOC. Since China cut its one-year loan prime rate, the benchmark lending rate, the net interest margins of commercial banks have narrowed significantly since December 2021. In a report, Chang Huili, an analyst at Huatai Securities, said these factors led to a slowdown in banks' profit growth.

The reduction of banks' borrowing costs will be a result of an RRR cut. Chang said that the move is conducive to improving banks' credit expansion capability and increasing their willingness to do so.