China cuts cash reserve ratio, releasing $188bn of liquidity

Bloomberg

China cut the amount of cash most banks must hold in reserve, acting to counter the economic slowdown in a move that puts the central bank on a different policy path than many of its peers.
The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks on December 15, releasing 1.2 trillion yuan ($188 billion) of liquidity, according to a statement.
The reduction was signalled by Premier Li Keqiang last week when he said that authorities would cut the RRR at an appropriate time to help smaller companies, and is the second reduction this year. The decision comes after recent data showed the economy and industry stabilising, although Beijing’s tightening curbs on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real-estate firms.
The cut is a “regular monetary policy action,” the PBOC said, pre-empting expectations that the decision was the start of an easing cycle. “Prudent monetary policy direction has not changed,” it said, adding that the bank “will continue with a normal monetary policy, maintaining the stability, consistency and sustainability of policy, and won’t flood the economy with stimulus.”
However, with the US Federal Reserve and other global central banks looking to tighten policy, the move to add stimulus by the PBOC makes the divergence between China and much of the rest of the world even clearer.
Separately, the Communist Party’s Politburo said China will continue to implement a proactive fiscal policy in 2022, and prudent monetary policy will be flexible and appropriate, and maintain reasonably ample liquidity, the official Xinhua News Agency. The meeting of the Politburo will be followed by the Central Economic Work Conference sometime this month, which will flesh out economic policy plans for the next year.
The cut will be applied to all banks except those that are already on the lowest level of 5%, which are mostly small rural banks, according to the statement. The weighted average ratio for financial institutions will be 8.4% after the cut, down from 8.9% previously, the PBOC said in a separate statement.
Some of the money released by the RRR cut will be used by banks to repay maturing loans from the PBOC’s medium-term lending facility, and some of it will be used to replenish financial institutions’ long-term capital, the central bank said. There are almost 1 trillion yuan worth of the 1-year loans maturing on December 15, the day the cut takes effect.
Even with the deepening housing market slump, authorities had been restrained in adding new support policies, holding monetary policy steady and maintaining a measured pace of fiscal spending. However, the PBOC signalled an easing bias in the latest monetary policy report last month, while the State Council urged local governments to speed up spending.
“The aim of the RRR cut is to strengthen cross-cyclical adjustment, enhance the capital structure of financial institutions, raise financial services capabilities to better support the real economy,” the PBOC said.
A cut in the reserve ratio doesn’t directly lower borrowing costs, but quickly frees up cheap funds for banks to lend, the PBOC said.