The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for some banks to reduce their funding costs and in turn help ease conditions for businesses and individuals.
The 1 percentage point reduction takes effect on Wednesday next week, the central bank said late on Tuesday.
About 900 billion yuan (US$143 billion) of outstanding medium-term lending facility (MLF) loans will be repaid on the day of the cut and another 400 billion yuan will be unleashed, it said in a statement.
The PBOC said the reduction in funds required to be parked with it will apply to large commercial banks, joint-stock banks, city commercial banks, rural commercial banks and foreign lenders.
It is intended to “improve the liquidity structure,” it said.
“It is not a liquidity-easing policy,” analysts, including Larry Hu (胡偉俊), head of China economics at Macquarie Securities Ltd in Hong Kong, wrote in a note. “It is not very likely for the PBOC to ease at this moment, given the economy still grew 6.8 percent year-on-year in the first quarter. The priority for China’s policy makers should remain as the deleveraging push.”
Domestic banks stand to make higher profits from lower reserve requirements.
The resulting drop in funding costs would boost the net interest margin of listed Chinese banks by 0.9 basis point and boost their profits by 0.6 percent, China International Capital Corp (中國國際金融) estimated.
The central bank announced a similar reduction in September last year.
Effective in January, it applied to all major banks, 90 percent of city commercial banks and 95 percent of rural commercial lenders and ranged from 0.5 percentage points to 1.5 percentage points depending on how much business banks do with small firms, agricultural borrowers and new companies.
While Tuesday’s announcement addresses the same issue, this cut also helps improve the funding structure for banks as the money will be used to repay MLF borrowing.
That eases banks’ burden of paying MLF interest to the PBOC, in effect increasing their ability to lend to individuals and companies. In turn, that reduces the demand for shadow banking credit to the economy.
The PBOC started to offer the MLF loans, ranging from three months to a year, as a traditional source of funding, outstanding funds for foreign exchange, fell amid a narrower trade surplus.
Outstanding MLF loans surged to a record 4.9 trillion yuan last month.
The reserve ratio requirement currently stands at 17 percent for large commercial lenders, a level explained by the need to keep China’s persistent current account surpluses from dousing the domestic economy in liquidity.
“This move is a clear effort from the PBOC to mitigate the pain of financial deleveraging,” said Yao Wei (姚煒), chief China economist at Societe Generale SA in Paris.
“As shadow credit growth is falling quickly now, banks need all the help they can get to sustain formal bank lending,” Yao added.
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