PBOC to cut RRR for rural commercial banks as a support for the economy

China's latest move to cut reserve requirements for rural commercial banks, albeit "unexpected," will lend support to the real economy, analysts said after the announcement on Monday morning.

China will cut its required reserve ratio for rural commercial banks, effective May 15, the central bank said.

The RRR for small- and medium-sized lenders with total assets below 10 billion yuan (US$1.47billion) will be lowered from around 11.5 percent to 8 percent, the same level as rural credit unions, the People’s Bank of China said.

The move follows a recent call from China’s State Council to lower the funding cost for small firms and lend more financial support to the real economy, Japanese investment bank Nomura said.

At a Council meeting on April 17, Chinese Premier Li Keqiang reiterated his call to resist a scattergun approach to monetary easing but called for more flexible monetary policy tools to spur lending to privately owned businesses.

But some analysts say the timing of the RRR cut announcement was “unexpected.”

The central bank posted the decision on its website just ahead of the A-share market’s morning trading session, which was very likely made to offset the negative impact of a sudden shift in US-China trade talks, Nomura said in its research note.

Last month, the PBOC reaffirmed its neutral monetary stance and chose to use the lower-profile targeted medium-term lending facility to inject liquidity instead of a high-profile monetary easing move such as an RRR cut, which will boost stock markets and stimulate the economy too much.

Amid complicated Sino-US trade relations, Wang Tao, chief economist at UBS Securities, said China may increase its policy stimulus as a response and financial markets may react sharply to the uncertainties.

The PBOC estimates that about 1,000 county-level rural commercial banks will benefit from the cut. And the policy is projected to inject a total of 280 billion yuan liquidity into the market, which will be lent to micro and small enterprises and private companies.