In a widely anticipated move, the PBOC lowered banks' required reserve ratio (RRR) by 50 basis points. According to the statement made by the Chinese central bank, the reduction in the required reserve ratio of banks will be effective from December 15.

 

According to the PBOC statement;

 

·        Weighted average RRR 8.4% for financial institutions after new discount.

·        Prudent monetary policy will be maintained.

·        The new RRR cut will release 1.2 trillion yuan long-term liquidity.

·        Liquidity will be kept reasonably abundant.

·        We will not focus heavily on providing incentives to the economy.

·        The new RRR cut will reduce capital costs for financial institutions by about 15 billion yuan per year.

 

With its focus on economic growth, China is actually positioned differently from many main economies. In particular, the market liquidity problem faced with the real estate sector shortage and the risks of slowdown in the economy are currently the main reasons for expansionary policy steps. It will not directly reduce the borrowing costs, however, a certain amount of credit acceleration will be achieved as it will partially reduce the funds cost of the banks. Still, China cannot open liquidity channels too quickly, as inflation is another concern.

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