China frees up 800 billion yuan by cutting RRR 50 bps

January 2, 2020

By CentralBankNews.info

China’s central bank lived up to expectations and lowered its reserve requirement ratio for large banks by another 50 basis points, freeing up 800 billion yuan in funds in a move the bank described as “a countercyclical adjustment” that increases the source of funds for financial institutions to directly support the real economy.

The People’s Bank of China (PBOC) cut the ratio for large financial institutions to 12.50 percent, it’s seventh cut in that ratio since April 2018 when it lowered it for the first time since 2016 from 17.0 percent.

Today’s cut in the reserve requirement, which takes effect Jan. 6, comes after Premier Li Keqiang on Dec. 23 said the government was studying further cuts in reserve requirements, among other measures, to lower borrowing costs for small businesses, cementing expectations that PBOC will continue its easing cycle in 2020.

PBOC said on its website the cut in the ratio would lower banks’ overall cost of funds by around 15 billion yuan annually, and small and medium-sized banks along with rural institutions would receive over 120 billion yuan of long-term funds to help local businesses.

PBOC added the cut “is by no means an indiscriminate stimulus measure” but helps offset changes in the run-up to the Spring Festival, or Long Lunar holidays, later this month when demand for cash typically rises.


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It added such countercyclical adjustments of monetary policy are “appropriate and sound,” and the monetary policy stance remains unchanged.

The cut in the reserve requirement comes days after the PBOC told financial institutions to use the Loan Prime Rate (LPR), which is already used to price 90 percent of new loans, to price all new loans beginning this month and convert existing loans to LPR from March to August.

Last August PBOC reformed its system for setting LPR and designated it as the new benchmark rate for all loans. Initially LPR was set at 4.25 percent, 10 percent below the old benchmark lending rate at 4.35 percent, and 6 points below the LPR that had been unchanged since October 2013.

Under the new mechanism, which is based on the rate that 18 institutions offer their best customers, LPR is published on the 20th of ever month and the 1-year LPR was then lowered by 5 basis points in September and then another 5 points in November to its current rate of 4.15 percent.

www.CentralBankNews.info