China’s central bank eyes reserve ratio cut to boost lending; hints at more policy easing

Chinese authorities have indicated a possible cut in the reserve ratio which is the amount of money banks must set aside as reserves to propel lending, a report said.

In an interview with state-run Xinhua News Agency, Zou Lan, head of the People’s Bank of China’s (PBOC) monetary policy department said that the PBOC may use open market operations, medium-term lending facilities and reserve requirements among other monetary policy tools to provide “strong” support for reasonable growth in credit.

The statement comes after the central bank provided a massive amount of liquidity via other tools in recent weeks.

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Zou said that the central bank will also strengthen its counter-cyclical and cross-cycle policy adjustments to create favorable financial conditions for the country’s economic growth, Bloomberg News reported.

The PBOC will also take measures to prevent funds from clogging and idling while guiding financial institutions to strengthen their liquidity risk management for stable money market operations, Zou added.

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In December 2023, Chinese policymakers doled out an unprecedented 800 billion yuan ($111 billion) of one-year loans to commercial lenders. They also injected even more short-term cash through open market operations at year-end. The combined effect was equivalent to at least a 50-basis point reserve-ratio cut, the Bloomberg News report said.

Economists polled by Bloomberg in December forecast a 25-basis point cut to the reserve requirement ratio, or RRR, in the first quarter of 2024.

According to the central bank-backed Financial News, RRR cuts will free up long-term liquidity for the Chinese economy after it was estimated to release more than 500 billion yuan following the September rate cut.

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The CSI 300 benchmark extended losses and fell 1.3% Monday to close at its lowest since February 2019. The Hang Seng China Enterprises Index declined more than 2% to close at the lowest since November 2022 dragged by losses in tech stocks, said the Bloomberg News report.

Chinese government bond yields dropped to the lowest in nearly four years, while banks are able to raise short-term debt more cheaply in money markets than from the central bank, the report added.

(With inputs from Bloomberg)

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