The Chinese central bank, in a major economic recovery measure, announced that banks will be able to hold lesser reserves than before to keep liquidity sufficient to avert any crisis. The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for all banks, except those that have implemented a 5 per cent reserve ratio, by 25 basis points from March 27.
The move was widely expected. However, it has come earlier than financial markets had expected.
China’s reserve ratio cuts: Why such a drastic measure?
The move follows the release of data that shows an uneven recovery in the Chinese economy in the first two months of 2023. The country continues to see a stronger-than-expected credit expansion, stoking crisis fears amid ongoing crisis at financial institutions in the United States and Switzerland.
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“At present, risks in the overseas banking sector are increasing and global liquidity is under pressure, and the external environment is becoming increasingly complex,” Wen Bin, chief economist at China Minsheng Bank, was quoted as saying by Reuters.
“In the first two months of this year, China’s main economic indicators showed a positive trend, but the overall recovery foundation is not yet solid.”
China’s reserve ratio cuts: What does it mean for Chinese banks, economy?
Analysts cited by Reuters estimate that the move has freed up over 500 billion yuan ($72.6 billion).
The central bank has promised to make its policy “precise and forceful” this year to support the economy, keeping liquidity reasonably ample and lowering funding costs for businesses.
The People’s Bank of China said the cut reflected 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.”
China’s new premier Li Qiang has pledged to push the overall economy to improve while fending off any major risks, state media reported on Friday.
The reduction follows a 25-bps cut for all banks in December.
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