The People’s Bank of China (PBoC) today announced that it would cut the reserve requirement ratio (RRR) by 50 basis points to 19.5% for large financial institutions, effective tomorrow.
This will immediately inject up to RMB600 billion (US$96 billion) to the banking system, which could help lower companies’ funding cost.
In addition, the central bank will also slash the RRR by an additional 50 basis points for city commercial banks and non-county rural commercial banks that have met the lending target to small and medium enterprises.
China Agricultural Development Bank will also get an additional RRR cut of 400 basis points.
Today’s RRR cut is a positive move, but further monetary policy easing by the central bank is still required to the economy from falling below 7% in the first quarter, and fend off rapid dis-inflationary pressures, says a report by the Australia and New Zealand Banking Group Limited (ANZ).
The bank expects another two 50 basis points cuts this year, and the deposit rate will be cut by up to 50 basis points also.
The reserve requirement ratio cut was prompted by a number of factors, including the lower-than-expected official producer managers index (PMI), which surprisingly fell to 49.8 in January, below the benchmark level of 50 for the first time since September 2012.
It was also driven by the balance of payments data, which suggests that capital outflow has quickened in the fourth quarter last year, which had further tightened domestic monetary conditions.
According to the State Administration of Foreign Exchange (SAFE), China’s capital and financial account saw a deficit of US$91 billion in the fourth quarter.
In addition, the monetary easing of major global central banks, including the European Central Bank, Reserve Bank of Australia, and Bank of Canada, may have also put more pressures on the PBoC to ease.