(Bloomberg) -- China’s central bank cut the amount of cash most banks must hold in reserve in order to boost lending in the economy as growth starts to wane.
The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks, according to a statement published Friday. That will unleash about 1 trillion yuan ($154 billion) of long-term liquidity into the economy, the central bank said.
The cut will be effective on July 15, according to the statement.
The last time the bank cut the main ratios was during the first wave of the pandemic in 2020, when it was trying to boost the economy after lockdowns to contain the Covid-19 outbreak. This reduction was signaled earlier this week, when the State Council, China’s equivalent of a cabinet, hinted the central bank would make more liquidity available to banks so they could lend to smaller firms hurt by rising costs.
A reserve ratio cut, while not immediately lowering the cost of borrowing in China, is a rapid way of freeing up cheap funds for lending and has been a favored tool in the central bank’s efforts to control the economic slowdown in recent years.
Unlike an interest rate cut, a reduction in the RRR doesn’t necessarily signal a return to broad-based monetary easing in China. The impact on interest rates is indirect: the additional funds unleashed to banks may lower their cost of liabilities and encourage lending to the real economy and small businesses.
The PBOC has refrained from changing its policy rates since cutting them early last year during the height of the pandemic in China. It gradually tightened monetary policy since late 2020 through guiding credit growth lower. The PBOC has also offered annual RRR discounts to qualified lenders since 2017 as part of an “inclusive financing” program to help guide funds to flow into corners of the economy where credit is traditionally scarce.