What’s new: China will reduce banks’ reserve requirement ratio (RRR) by 50 basis points on Feb. 5, central bank Governor Pan Gongsheng said at a news briefing on Wednesday.
The move, which Pan said will release 1 trillion yuan ($141 billion) of liquidity into the financial system, is aimed at providing additional stimulus to the economy, analysts said.
“Compared with the central banks of major international economies, there is still considerable room for adjustment,” Pan said, noting that the current average level of the RRR is 7.4%. “This serves as an effective tool to supplement the long-term liquidity in the banking system.”
Markets are also expecting a shift in the U.S. Federal Reserve’s monetary policy, which gives China more space in its own monetary policy implementation, Pan said.
“It’s another step in the right direction, but monetary policy by itself is not enough to boost economic momentum,” Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd., wrote in a note. “A more proactive fiscal stance focusing on consumption is more important and effective.”
The background: The People’s Bank of China (PBOC) last reduced the RRR in September by 25 basis points. Wednesday’s announcement of a 50 basis-point reduction was double the size of the cut usually made.
In 2022, the PBOC lowered the RRR twice, each time by 25 basis points, and made two further cuts of 25 basis points in 2023. Last year’s reductions injected more than 1 trillion yuan in long-term liquidity into the banking system, Pan said in a speech in October.
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Contact reporter Qing Na (qingna@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)
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