China central bank slashes reserve requirement to boost struggling businesses

China’s central bank has slashed the amount of money the country’s lenders need to hold in reserves.

The move to loosen the reserve regime by the People’s Bank of China (PBOC) is being seen as a bid to stimulate the country’s economy by incentivising banks to lend.

The required reserve ratio (RRR) has been cut by 0.5 percentage points, bringing the average RRR for China’s entire banking sector to 8.4 per cent.

Relaxing rules on the amount of money banks have to keep on standby to offset liquidity risks can boost the stock of credit flowing around an economy.

Banks have a greater incentive to expand their loan book due to having more capital to invest, meaning businesses can access credit much easier, jolting growth in the process.

The PBOC’s move is being viewed by analysts as a play to cut interest rates in the economy without overheating the credit market.

“The PBOC is trying to nudge banks to lower lending rates to help struggling firms but doesn’t want to engineer a sharp pick-up in the quantity of lending,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

The decision to reduce the RRR instead of cutting interest rates suggests Beijing is moving toward a more conservative policy stance, analysts also highlighted

The move “gives a signal to the market that the government has turned from aggressive policy actions in the second half of this year to stabilising the economy in 2022,” said Iris Pang, chief economist for Greater China at ING.