China’s central bank will next month lower the amount of reserve requirement that financial institutions have to set aside, amid efforts to support economic recovery and confidence.
Reserve requirement ratio (RRR) for financial institutions will be cut by 0.5 percentage points from Feb. 5, which will provide 1 trillion yuan (about 140.76 billion U.S. dollars) in long-term liquidity, the People’s Bank of China Governor Pan Gongsheng said at a press conference Wednesday.
The central bank also announced to reduce re-lending and re-discount interest rates for the rural sector and small businesses by 0.25 percentage points on Thursday.
These measures, Pan said, will help drive down the loan prime rate or LPR, a market-based benchmark lending rate, thereby better serving the real economy.
He said the country still has “sufficient policy space” to maneuver its monetary policy, and the central bank will enhance counter-cyclical and cross-cyclical adjustments to create a favorable monetary and financial environment for the economy.
The announcement of the first RRR reduction this year, following two cuts last year, gave a strong boost to the financial markets. The benchmark Shanghai Composite Index jumped 3.03 percent Thursday in its largest daily gain since March 16, 2022, while the smaller Shenzhen Component Index climbed 3 percent.
Analysts saw the move as a timely support for the economy, saying it has sent a strong positive signal of the authorities’ determination to enhance support for the economy and the capital market.
The RRR reduction, which comes earlier and greater than market expectation, will bolster the confidence of business entities and investors as well as the economic recovery, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company Limited.
Ming Ming, chief economist at CITIC Securities, said the move will better coordinate with the country’s fiscal policy, ensure credit supply expansion and consolidate the improving momentum of the economy.
Last year, China’s economy grew 5.2 percent from one year earlier, higher than the annual target of around 5 percent. In the fourth quarter, the economy expanded 5.2 percent year on year, and grew 1 percent quarter on quarter.
Pan Gongsheng said the central bank will also employ various monetary policy tools this year to keep liquidity at a reasonable and ample level.
Analysts said the RRR reduction, which comes before the Spring Festival that falls on Feb. 10 this year, will help meet liquidity needs during the holiday.
The overnight Shanghai Interbank Offered Rate (Shibor), which measures the borrowing cost of China’s interbank market, increased 3.6 basis points to 1.844 percent Thursday. The one-month rate remained flat at 2.3 percent.
