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Friday, April 03, 2020, 23:03
China cuts reserve requirement ratio for small, midsize banks
By Xinhua
Friday, April 03, 2020, 23:03 By Xinhua

BEIJING — China's central bank on Friday announced a decision to cut the reserve requirement ratio (RRR) for small and medium-sized banks by 100 basis points in its latest effort to bolster the real economy amid the novel coronavirus outbreak.

The RRR cuts will be implemented in two phases, with the first round of 50 basis-point reductions expected on April 15. The second phase of reduction of equal amount will be effective on May 15, said the People's Bank of China (PBOC), the central bank, in an online statement.

The reduction in the cash that lenders must hold as reserves is expected to unleash around 400 billion yuan (about US56.3 billion) of long-term capital into the market, the PBOC said.

The PBOC will also cut the interest rate on excess reserves for financial institutions from 0.72 percent to 0.35 percent starting April 7, the first time it is cutting the rate since 2008, it said

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The cuts are expected to inject liquidity into around 4,000 small and medium-sized lenders including rural cooperatives, rural commercial banks and city commercial banks operating only within provincial administrative areas, adding sources of stable financing for the country's small and medium-sized enterprises (SMEs), the PBOC said.

After the cuts, the RRR for the country's small and medium-sized lenders will be slashed to 6 percent, a relatively low level compared with the ratio in other developing countries and past rates in China, the PBOC noted.

The PBOC will also cut the interest rate on excess reserves for financial institutions from 0.72 percent to 0.35 percent starting from April 7, the first time it slashes the rate since 2008, it said.

The move will push banks to enhance their capital use efficiency and help them better serve the real economy, especially SMEs, the PBOC said.

Friday's decision marked the third RRR cuts the central bank has announced this year to shore up the economy, which was under significant downward pressure as a result of the novel coronavirus disease (COVID-19).

The previous cuts, announced on Jan 1 and March 13, respectively, released a total of 1.35 trillion yuan of liquidity into the market.

The high frequency of RRR cuts marked continued government efforts in counter-cyclical adjustments, while at the same time reflected the urgency in driving economic recovery amid epidemic control, said Wen Bin, chief researcher with China Minsheng Bank, in a research note.

China has been resorting to a package of monetary and fiscal policies to support the country's SMEs, which were hardest hit by COVID-19.

The central bank has expanded the re-lending and re-discount quota for small and medium-sized banks as part of efforts to guide funds to cash-strapped SMEs, said Liu Guoqiang, vice governor of the PBOC, at a press conference Friday.

READ MORE: China says has ample policy tools to cope with virus impact

Small firms are also expected to get cheaper loans, as the central bank has been guiding lending rates down via lower policy rates, Liu noted.

While the epidemic has inevitably added to the risks of the country's banking sector, Liu said the industry as a whole is capable of absorbing the losses and cushioning against a potential rise in non-performing loans.

Wen expected the central bank would continue to step up counter-cyclical adjustments and reduce the financing costs for companies via lower policy rates.  

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