China’s central bank has said it will further reduce the reserve requirement ratio for the majority of lenders in the country. The move is intended to ensure enough funding for firms amid growing trade tensions.
China’s central bank announced it would cut the reserve requirement ratio for most lenders by 50 basis points to free up money for small companies as a trade war with the US looms.
The move to reduce the amount of cash that banks must hold in reserve will free up a combined 700 billion yuan ($108 billion, €92.8 billion) in funding at commercial banks and the largest state-owned lenders, the People’s Bank of China (PBoC) said in a statement.
The policy is set to come into effect on July 5 — a day before new US tariffs are due to be imposed on Chinese imports worth $34 billion.
The planned reserve reduction will be the third by the central bank this year and has been widely anticipated by investors amid concerns over market liquidity. Economists are not ruling out further reductions later this year as borrowing costs rise due to Beijing’s clampdown on leverage in the financial system.
Major challenges ahead
“[The renewed reduction] sends a strong signal of policy easing on the part of the Chinese State Council and the PBoC,” said Nomura Chief China Economist Ting Lu.
“We believe the Chinese economy is yet to bottom out, and the situation could get worse before getting better.”
Banks will use the freed-up money to finance smaller firms, and also to support debt-to-equity swaps.
Regulators have been pushing for such swaps with a view to lessening the financial burden on many of China’s highly indebted companies.
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