Commentary on Political Economy

Friday 9 July 2021


China Cuts Reserve Ratio for Banks to Boost Slowing Economy

Bloomberg News
Updated on 
  • RRR cut will inject about 1 trillion yuan of liquidity
  • Timing, magnitude of move suggest concerns about GDP outlook

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China’s central bank cut the amount of cash most banks must hold in reserve in order to boost lending and bolster an economic recovery that’s starting to wane.

The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks, according to a statement published Friday. That will unleash about 1 trillion yuan ($154 billion) of long-term liquidity into the economy and will be effective on July 15, the central bank said.

More Cash to Lend

Reserve ratio cuts will allow banks to use more of their cash

Source: People's Bank of China

The reduction was signaled earlier this week, when the State Council, China’s equivalent of a cabinet, hinted the central bank would make more liquidity available to banks so they could lend to smaller firms hurt by rising costs. The timing and magnitude of the move, coming a week before second-quarter growth data, suggests mounting concerns about the economy’s outlook, economists said.

“The PBOC came in broader and sooner than expected, highlighting the policy urgency to support the China economy,” said Ken Cheung, chief Asian FX strategist at Mizuho Financial Group Inc. “Such firm easing measures could further fuel concern over China’s growth outlook in the second half as well as the upcoming second-quarter GDP figures in the coming week.”

The last time the bank cut the main ratios was during the first wave of the pandemic in 2020, when it was trying to boost the economy after lockdowns to contain the Covid-19 outbreak.

China’s 10-year government bond yield pared gains of as much as four basis points after the RRR cut, standing little changed at 2.99% as of late Friday. FTSE China A50 futures rose as much as 1.1%.

Stronger Lending

New loans now above the 2020 level which the PBOC had been targeting

Source: People's Bank of China

China is wary of overstimulating the economy, and the central bank said in a statement that the cut doesn’t mean there’s been a change to the “prudent monetary policy.” The PBOC will maintain the “stability and effectiveness of monetary policy, keep a normal monetary policy, and won’t flood the economy with stimulus,” it said.

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“The magnitude of the RRR cut is more than expected. The RRR reduction paints quite a stark contrast to PBOC’s very cautious stance on its liquidity injections in the first half of the year,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc in Hong Kong. “Even though the central bank said the cut shouldn’t be seen as a sign it’s shifting its policy stance, the market will interpret the move as a tilt toward looser monetary policy in the second half.”

Repaying Loans

Overall liquidity in the economy will basically be stable, as the extra funds will be used to repay maturing medium-term loans, fill any liquidity gaps due to the tax season from mid to late July, and raise long-term capital, the bank said.

A reserve ratio cut, while not immediately lowering the cost of borrowing in China, is a rapid way of freeing up cheap funds for lending and has been a favored tool in the central bank’s efforts to control the economic slowdown in recent years.

What Bloomberg Economists Say...

The People’s Bank of China’s isn’t taking any chances with the recovery -- the surprise 0.5 percentage point cut to the required reserve ratio will inject 1 trillion yuan into the banking system, helping juice growth that’s poised to slow in the second half. The RRR cut and a larger-than-expected jump in June credit mark a decisive turn to an easing stance.

David Qu, China economist

For the full report, click here.

The announcement came just after the release of data showing that credit growth in June was much stronger than expected, with much of that expansion coming from bank loans.

The RRR cut comes against the backdrop of stable interest rates. The PBOC has refrained from changing its policy rates since cutting them early last year during the height of the pandemic in China. It gradually tightened monetary policy since late 2020 through guiding credit growth lower. The PBOC has also offered annual RRR discounts to qualified lenders since 2017 as part of an “inclusive financing” program to help guide funds to flow into corners of the economy where credit is traditionally scarce.

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