Central bank to cut reserve requirement ratio

China's central bank is to cut the reserve requirement ratio for financial institutions — excluding finance companies, financial leasing companies and automobile financing companies — by 50 basis points from January 6.

This is to support the development of the real economy as well as to reduce the real cost of social financing, according to the People's Bank of China.

The central bank said the cut is an across-the-board reduction reflecting counter-cyclical adjustment, which would unleash more than 800 billion yuan (around US$115 billion) in long-term funds, effectively increase the stable sources of funds for financial institutions to support the real economy and reduce the capital costs for financial institutions to support the real economy.

Currently, the required reserve ratio is 13 percent for large financial institutions and 11 percent for smaller ones since the last adjustment came into effect on September 16.

In the comprehensive lowering of the reserve requirements, small and medium-sized banks such as urban commercial banks operating exclusively within province-level regions, rural commercial banks serving counties, rural cooperative banks, rural credit cooperatives and village banks will receive long-term funds of more than 120 billion yuan.

At the same time, capital costs for banks will be cut by about 15 billion yuan a year, which can lead to a reduction in the real cost of social financing, especially the financing costs for micro and private enterprises, according to a PBoC official. 

The ratio cut will offset the large amount of cash drawn from banks before Spring Festival, thus maintaining the stability of the overall liquidity of the banking system, reflecting a scientific and prudent grasp of the strength of the counter-cyclical adjustment of monetary policy, the bank noted. "The prudent monetary policy stance remains unchanged."

The move is in line with market expectation, as many analysts had predicted that the bank would increase funding to the financial system around the New Year.

Wen Bin, chief analyst at China Minsheng Bank, said around 600 billion yuan of reverse repo is due to expire in the first half of January, and demand for funds will be under pressure in the run-up to the Spring Festival. Enterprises' tax payment, banks' reserve payment and the issuance of local government bonds will all put pressure on liquidity, thus cutting the reserve requirement ratio is a way to enable market liquidity to remain reasonable and adequate.

The State Council said in a guideline on December 24 that supportive fiscal policies to reduce enterprises' social security burdens and encourage on-the-job training would be extended for another year.

Financial support will also be stepped up for private, micro and small firms, it added.

On December 23, Chinese Premier Li Keqiang stressed the need to foster a new economy and new growth engines by encouraging entrepreneurship and innovation. He promised to grant stronger support to small and medium-sized banks delivering direct services to small and micro-enterprises, as reported by CCTV.

"The government will carry out further research into the use of multiple tools including the reserve requirement ratio, re-lending and re-discounts to cut real interest rates and financing costs to ease the financing difficulties of small and micro-businesses," Li said.

Wen expected that the medium-term lending facility will remained unchanged in January, while the one-year loan prime rate on January 20 could fall from 4.15 percent to 4.1 percent and the five-year rate could also decline from 4.8 percent to 4.75 percent.