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China's central bank

China cuts some banks' reserve requirement ratios to steady liquidity

Sun, June 24, 2018 14:24

BEIJING, June 24, 2018 (News Wires) - China's central bank said on Sunday it would cut the amount of cash that some banks must hold as reserves by 50 basis points (bps) to accelerate the pace of debt-for-equity swaps and stimulate lending to smaller businesses.

The reserve reduction, the third by the central bank this year, had been widely anticipated by investors amid concerns over market liquidity and a potential economic drag from trade disputes with the United States.

The targeted cut in some banks' reserve requirement ratios (RRRs) - currently 16 percent for large banks and 14 percent for smaller banks - will take effect on July 5, the People's Bank of China (PBOC) said in Sunday's online statement.

The central bank said targeted RRR cuts will release about 500 billion yuan ($77 billion) for the country's five large state banks and 12 national joint-stock commercial banks. Lenders are encouraged to use the money to conduct debt-for-equity swaps, it said.

China's policymakers have been pushing for debt-for-equity swaps since late 2016 to ease pressures from over-borrowing by struggling firms. The country's top banks have rushed to sign deals with state-owned enterprises to ease their debt burden and give them time to turn around their business and improve their creditworthiness.

RRR cuts will also release about 200 billion yuan in funding for mid-sized and small banks to increase lending to credit-strapped small businesses, the PBOC said.

The combined 700 billion yuan liquidity injection into the banking sector has exceeded the market anticipated 400 billion yuan, according to Huatai Securities.

"The intensity of the move exceeded market expectations," Wang Jun, Beijing-based chief economist at Zhongyuan Bank, said.

"This move will help support the real economy and stabilise financial markets. We've seen rising debt defaults and funding strains on small firms, as well as a sharp adjustment in the capital market."

But the latest reserve cut signalled a "policy fine-tuning," not a policy reversal, Wang said.

The central bank said it will maintain prudent and neutral monetary policy as it seeks to cultivate an appropriate monetary and financial environment for China's economic growth and supply-side structural reforms.

The authorities have also kept monetary policy in neutral gear as they continue to clamp down on high corporate debt levels and risky lending practices that might harm China´s financial system.

The latest reserve cut follows a surprise cut in bank reserve requirements in April even though China's economy grew a faster-than-expected 6.8 percent in the first quarter.

Chinese policymakers have since said that the country will use targeted RRR cuts to boost financing to struggling smaller firms, as well as other measures.

The latest RRR cut is set to take effect a day before the United States and China are expected to begin collecting increased tariffs on respective lists of goods.

Fears of a full-blown trade war with Washington have magnified concerns about the outlook for the world's second-largest economy, following weaker-than-expected growth data for May and as a regulatory crackdown in its third year starts to weigh on business activity.

Net exports overall were already a drag on growth in the first quarter after giving an added boost to the economy last year, highlighting the need for sustained strength in domestic demand if significant new U.S. tariffs are imposed.

However, on the domestic front, the government's multi-year risk clampdown has slowly pushed up borrowing costs and is restricting alternative, murkier funding sources for companies such as shadow banking.

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