China to cut RRR by 50 basis points

Beijing: The People’s Bank of China (PBOC), China’s central bank, on Wednesday 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 (114.6 billion U.S. dollars) 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 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, China Economic Net reported.

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.

Wen expected the reduction to lead to lower pricing of the new loan prime rate (LPR) to be announced later this month, with the one-year LPR at 4.1 percent and the above-five-year LPR at 4.75 percent.

Noting the move will shore up market confidence, Wen said there is still room for further RRR cuts.

China’s economy expanded 6.2 percent in the first three quarters of 2019, and annual growth is set to meet the government’s target of 6 to 6.5 percent. The GDP data for 2019 is due to be released on Jan. 17.