China cuts banks’ reserve ratio for first time in 2023 to support recovery

By Ellen Zhang and Kevin Yao

BEIJING (Reuters), -China’s central banking said Friday that it will reduce the amount of cash banks are required to keep as reserves this year for liquidity support and a nascent recovery.

Chinese leaders pledged to increase support for China’s second largest economy. The country is slowly recovering from a slump caused by a pandemic.

The People’s Bank of China announced that it would reduce the reserve requirement ratio for all banks (RRR) by 25 basis points (bps) effective March 27, except for those who have implemented a 5% reserve rate.

The move, which came earlier than financial markets had anticipated, comes after data showed a gradual but uneven recovery in the economy in the first two months of the year, and stronger-than-expected credit expansion.

“Policymakers wish to maintain the economic momentum,” Zhou Hao is an economist at Guotai Junan International.

The central bank has not yet provided an estimate of the amount of long-term liquidity that will be released as a result. This will allow banks to lend more money.

Bruce Pang (chief economist at Jones Lang Lasalle) estimated that the move resulted in a net 600 billion Yuan ($87.08 trillion).

The central bank has committed to making its policy “precise and forceful” This year, we will support the economy by preserving liquidity and lowering financing costs for businesses.

It claimed that the cut represented its intention to “make a good combination of macro policies, improve the level of services for the real economy, and keep liquidity reasonably sufficient in the banking system.”

This reduction comes after a 25-bps reduction for all banks in December which resulted in approximately 500 billion yuan of liquidity.

“EFFECTIVE TOOL”

Yi Gang, the chief of China’s central bank, said at a press conference that China’s real rate of interest is at an acceptable level. Accordingly to him, cutting banks’ reserve requirements would still be an effective tool for supporting the economy.

Since 2018, the PBOC has reduced the RRR by 15 times, from almost 15%. Analysts speculate on how much room there is for further reductions.

“This will provide a bit of financial relief for China’s large and medium-sized banks,” Capital Economics’ Julian Evans-Pritchard stated in a note.

“It may also help nudge down lending rates slightly. But given the wider signs of policy restraint, we doubt it will have a significant and lasting impact on monetary conditions or credit growth.”

According to the central bank, the weighted average RRR of financial institutions was 7.6% after the reduction.

China’s economy grew in the first two months 2023, driven by infrastructure investment and consumption. However, its traditional growth engines remain a question mark. Exports are expected to remain weak during a global downturn. The crisis-hit property industry is slowly turning the corner.

China has set a modest goal for economic growth in this year’s China, which is around 5%. This comes after its economy cooled to 3% last year. It was one of the worst performances in almost half a century.

($1=6.8903 Chinese yuan renminbi)

(Reporting from Beijing newsroom, Ellen Zhang Liangping Gao and Kevin Yao. Editing by Kim Coghill

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