Central Bank of China Cuts Ratio for Reserve Requirement
On Monday in a post on its website, the People’s Bank of China or PBOC announced that it was cutting its reserve requirement ratio 50 basis points for all Chinese banks, which takes the ratio to 17% for the biggest lenders in the country. The cut becomes effective on Tuesday March 1.
This measure is just the latest example of a fine line that policy makers in China are trying to walk in their fight against the persistent outflows of capital amidst expectations that its currency, the yuan or renminbi, could become weaker due to slowing growth in the economy.
Through lowering its reserve requirement ratio known also as its RRR, by one half of a percentage point, the PBOC is seeking in part to offset actions of its own in support of its currency.
For the largest banks, the ration of its total deposits that must remain in reserved came down from 17.5% to Tuesday’s 17%.
The Chinese central bank has been selling its dollars and purchasing renminbi to boost the renminbi’s value, which had come under heavy pressure.
However, that also siphoned liquidity from the system. As a way of counteracting that, the bank injected billions of its renminbi through operations on the open market.
The RRR cut is a way of doing the same, essentially, it represents a lending quota.
On Monday, in its news release, the central bank of China said the lowering was intended to keep reasonable and adequate liquidity in its financial system and to guide the moderate, steady growth of credit and money.
Over the past few months, however, the PBOC has slowly switched focus from the reserve requirements and instead has put more emphasis on the interest rates to control the liquidity, to encourage credit in the lending market of bank-to-bank, which is regarded generally as being market oriented.
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