China makes first RRR cut of 2020

2020-Jan-2       Source: Xinhuanet.com

The People’s Bank of China (PBOC), China’s central bank, yesterday decided to cut the reserve requirement ratio (RRR) for financial institutions by 50 basis points from Jan. 6 to spur the real economy

The People’s Bank of China (PBOC), China’s central bank, yesterday decided to cut the reserve requirement ratio (RRR) for financial institutions by 50 basis points from Jan. 6 to spur the real economy.

The move will cut the cash that lenders must hold as reserves, releasing about 800 billion yuan (US$114.6 billion) of long-term liquidity to bolster the economy and reduce social financing costs.

An unnamed official with the PBOC said the reduction will offset the impacts of strong cash demand ahead of the Spring Festival to keep overall liquidity in the banking system basically stable, denying “flood-like” stimulus.

“The stance of prudent monetary policy has not changed,” the official stressed.

The central bank urged financial institutions to effectively use the additional funds to increase support for small, micro and private businesses.

More than 120 billion yuan (US$17.2 billion) in long-term funds is expected to be unlocked for small-and medium-sized lenders, which will build up their capacities to support the targeted enterprises, said the central bank.

Meanwhile, the move will slash banks’ capital costs by 15 billion yuan per year, which would help reduce the real cost of social financing.

The New Year move came as the Chinese economy ended 2019 on stable footing despite domestic headwinds and external uncertainties, but downward pressures still loom large.

The year-end tone-setting Central Economic Work Conference last month noted that the country faces rising downward economic pressure amid intertwined structural, institutional and cyclical problems, pledging stronger policy moves to keep the economy on a stable track.

In 2020, monetary policy should be pursued with moderate flexibility to maintain market liquidity at a reasonably ample level, according to the conference.

Wen Bin, chief analyst at China Minsheng Bank, said the move was in line with market expectations as the maturity of 600 billion yuan of reverse repos in January, coupled with tax payments and higher cash demand during the Spring Festival, will put strains on liquidity.

Editor: Monica Liu

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