China Cuts Reserve Requirement Ratio

China's central bank on Sunday lowered the reserve requirement of some lenders to free up as much as CNY700 billion or $108 billion funds to provide liquidity support for small businesses struggling with debt.

The People's Bank of China said in a statement that it will reduce the ratio of cash that banks should retain as reserves by 50 basis points. This is the third reduction in the ratio this year and the biggest of them.

The cut in RRR will support qualified debt-to-equity swap programs targeted at firms burdened with debt. The decision will take effect on July 5.

The bank had earlier lowered the RRR last April.

The latest RRR cut comes as China's trade war with the US escalates with both sides threatening more tariffs on imports.

The RRR reduction was also widely expected after the executive meeting of State Council held on June 20 recommended such an action. The council said targeted reduction will boost finance to small and micro enterprises.

The PBoC said it will continue to implement a stable and neutral monetary policy to create a suitable monetary and financial environment for high-quality development and supply-side structural reforms.

Julian Evans-Pritchard, an economist at Capital Economics, noted that unsurprisingly, growing evidence of a shift in monetary policy is being linked by many to concerns about the impact of a US tariffs on China's economy.

But the bigger threat to China's economy has always been the delayed impact of last year's policy tightening, the economist added.

The RRR cut does seem likely to result in looser monetary conditions given signs that policymakers are becoming more concerned about the downside risks to economic activity from slowing credit growth, Evans-Pritchard said.