China’s central bank lowered its reserve requirement for most financial institutions for the second time this year, as expected, saying this should “support the development of the real economy and steadily bring down overall financing costs.”
The People’s Bank of China (PBOC) cut the required reserve ratio (RRR) for financial institutions by another 50 basis points as of Dec. 15 and has now cut it by 1 percentage point this year following a similar cut in July.
PBOC said the move should release 1.2 trillion yuan of liquidity, slightly more than the cut in July that released 1 trillion.

     PBOC operates three different reserve ratios depending on the type of financial institutions said today’s cut doesn’t apply to those institutions that already employ a 5.0 percent ratio, mainly small rural banks.
The weighted average RRR for financial institutions will be 8.4 percent after the cut, down from 8.9 percent previously, and prior to the cut the RRR for large financial institutions was 10.5 percent.
PBOC said it would continue to implement “a sound monetary policy,” and would “keep liquidity adequate at a reasonable level, and keep the growth of money supply and the aggregate financing to the real economy (AFRE) basically in line with the nominal GDP growth.
PBOC often uses the reserve ratio to stimulate economic activity and in 2020 the bank’s first move to ease policy at the onset of the COVID-19 pandemic was to cut the ratio for large financial institutions in January after which large amounts of liquidity was injected.

     In February and April, 2020, the  benchmark interest rate, Loan Prime Rate, was then cut.

     Today’s move by PBOC comes after Premier Li Keqiang on Friday said the amount of cash banks have to keep in reserve would be cut at an appropriate time.

      At the same meeting with International Monetary Fund Managing Director Kristalina Georgieva, Li also said China would increase its support for the real economy, especially for small and medium-sized companies.

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