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China will cut the amount of cash that banks are required to hold as reserves, releasing about 1 trillion yuan ($154.19 billion) in long-term liquidity to support the post-COVID economic recovery in the world’s second largest economy.
The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for banks by 50 basis points, effective from July 15.
The RRR cut is a broad-based one, with only financial institutions that are currently implementing 5 per cent RRR excluded, and the RRR cut is estimated to release about 1 trillion yuan long-term funding, said the PBOC. After the cut, the weighted average RRR for financial institutions will be lowered to 8.9 per cent, it said.
China last cut the RRR in April last year, when the Chinese economy was still badly affected by the Covid-19 outbreak. The economy has largely rebounded to the pre-pandemic growth levels, driven by a robust growth in exports, but the growth is losing momentum and smaller companies have been struggling amid the pressure from a recent surge in commodity prices.
Many analysts believe pent-up COVID demand has now peaked and that growth rates will start to moderate in the second half of the year, weighed down by weakening exports, surging producer price inflation and Beijing’s continued crackdown on the property market.
Prices of most commodities have surged this year, which has brought difficulties such as rising costs to small and micro companies, said the central bank.
China will keep stability and effectiveness of its monetary policy without resorting to flood-like stimulus and will step up support to smaller companies in a targeted approach, it said.
Next, the country will continue to implement prudent monetary policy, make stability a priority, keep liquidity reasonably ample and maintain money supply and the growth of total social financing largely match the nominal economic growth, said the central bank.
It will also make cross-cyclical adjustments, support smaller companies, green development and technology innovations and create an appropriate monetary and financial environment for high-quality development and supply-side reforms, said the central bank.
The PBOC said that the RRR cut doesn’t mean a fundamental shift of China’s monetary policy. “China’s monetary policy has returned to the normal before the Covid-19 pandemic in the first half of the year and the latest RRR cut is just normal operation.
Part of the funding will be used by financial institutions to repay maturing Medium-Term Lending Facility and some funding will by used to fill the liquidity gap to be caused by tax repayment peak in late July,” said the central bank, adding that “liquidity in the banking system will be maintained largely stable.”
The RRR cut beat market expectation as most analysts expected a targeted cut for smaller banks after the State Council on Wednesday said China should used monetary tools such as RRR cuts to step up financial support to the real economy, in particular smaller companies.
China’s May factory gate prices rose at their fastest annual pace in over 12 years in June due to surging commodity prices. Coupled with supply chain issues, including a global shortage of semiconductors, industrial output slowed for the third straight month in May.
Underlying demand remains weak in China. Consumer inflation, which eased in June, still fell way short of the government’s target of around 3 per cent.
“Even at the height of the Covid-19 pandemic last year, the PBOC only resorted to broad RRR cut once, which was 50 basis point cut, and it was followed by targeted RRR cuts,” said Ming Ming, chief fixed-income analyst at CITIC Securities. “In that sense, the latest cut is much stronger than expected.”
“The cut reflects the government’s support for the smaller companies and also shows its concerns over economic slowdown, in particular their worries over that the real estate sector and exports are expected to see downward pressure in the second half of the year.”
He believes the PBOC’s statement indicates that China is returning to a stage with neutral but lightly loose monetary policy.