China cuts reserve requirement ratio by 50 basis points

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China will cut the amount of cash that some banks must hold as reserves by 50 basis points (bps) from July 5, the People’s Bank of China (PBOC) said in an online statement on Sunday.

The targeted cut in some banks’ reserve requirement ratios (RRRs), currently 16 percent for large banks and 14 percent for smaller banks, is the third such move by the central bank this year, which will unlock about 700 billion yuan, or about more than 100 billion US dollars of liquidity.

The move aims to support qualified debt-to-equity swap programs and boost financial support for smaller businesses, the central bank said.

The targeted RRR cuts will release about 500 billion yuan (77 billion US dollars) for the country’s five large state banks and 12 national joint-stock commercial banks. The lenders are encouraged to use the money to conduct debt-for-equity swaps, it said.

China has been pushing for debt-for-equity swaps since late 2016 to ease pressures from over-borrowing by struggling firms.

RRR cuts will also release about 200 billion yuan in funding for mid-sized and small banks to increase lending to credit-strapped small businesses, the PBOC said.

The combined 700 billion yuan liquidity injection into the banking sector has exceeded the market anticipated 400 billion yuan, according to Huatai Securities.

Chen Jiahe, chief strategist of Cinda Securities, said China’s ongoing deleveraging process has caused liquidity shortage in the financial market, and some companies are starting to default on their debts. Therefore, this move by the central bank is to maintain the stability of the financial market.

The move is an implementation of decisions made at a State Council executive meeting on June 20, the PBOC said.

The meeting decided targeted cuts in banks’ RRR and other monetary policy tools will be used to boost credit supply to small and micro businesses.

The central bank said it will maintain neutral and prudent monetary policy as it seeks to cultivate an appropriate monetary and financial environment for China’s economic growth and supply-side structural reforms.

(With input from agencies)

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