China freeing up 1 trillion yuan will help support businesses, but impact seen as ‘negligible’ to economy in near-term

People’s Bank of China confirmed on Friday that it will cut the reserve requirement ratio (RRR) for financial institutions from next Thursday to support the real economy

The reserve ratio is the portion of a commercial bank’s liabilities that it must hold onto against possible losses, rather than lend or invest

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The average required reserve ratio (RRR) for Chinese banks is being reduced to 8.9 per cent following the move by the People’s Bank of China on Friday. Photo: Bloomberg

Frank Tangin BeijingandSu-Lin Tanin Hong Kong

Published: 5:54pm, 9 Jul 2021Updated: 11:32pm, 9 Jul 2021

China’s central bank has announced it will cut the reserve requirement ratio (RRR) for major commercial banks by 0.5 percentage points, releasing 1 trillion yuan (US$154 billion) worth of liquidity into the interbank system on Thursday with an aim of supporting small Chinese businesses with more credit.

The move comes amid signs that China’s economic growth is slowing. But economists say it will do little to lift consumer spending or alleviate economic tightening in the second half of the year after a buoyant first half, led by 18.3 per cent growth in the first quarter of the year.

The cut by the People’s Bank of China (PBOC) will allow most banks to maintain a reduced average ratio of 8.9 per cent, while small banks that now have a lower reserve ratio of 5 per cent will be excluded.

The reserve requirement ratio sets the minimum amount of reserves that must be held by banks and cannot be loaned out.

An extra 1 trillion yuan will be available for banks to lend as of Thursday, though some of the liquidity will be used to repay the 400 billion yuan (US$62 billion) worth of medium-term lending facility loans to banks that will mature on Thursday. In addition, some of the extra liquidity will be lent to firms so they can pay taxes due later this month.

The new normal of economic growth may be slower than the pre-Covid period, and this may last much longer than expected

Zhiwei Zhang, Pinpoint Asset Management

After China’s sharp economic recovery in the first half, some economists now expect second-half economic growth to drop to about 5 to 6 per cent, with domestic consumption weak and small firms are under pressure from rising costs. The Chinese economy could be at risk of a capital outflow if the US raises interest rates in an effort to tighten rapid recovery in its market.