China Cuts Reserve Requirement Ratio To Spur Liquidity

China's central bank reduced the amount of cash that banks should set aside as reserves to spur liquidity ahead of the Spring Festival.

The People's Bank of China on Wednesday lowered the reserve requirement ratio, or RRR, by 50 basis points, with effect from January 6. The RRR cut will release CNY 800 billion liquidity into the financial system.

The bank had reduced RRR three times last year.

The ratio for big banks was reduced to 12.5 percent and that for smaller banks to 10.5 percent.

The PBoC said the reduction will increase the source of funds available for financial institutions and cut the cost of funding, which will help alleviate the stress on small and micro enterprises, the bank noted.

The bank added that the injection will bring more funds ahead of the Spring Festival and the liquidity in the banking system will be kept stable.

Julian Evans-Pritchard, an economist at Capital Economics, said the latest RRR cut will ease liquidity conditions in the short-run, but will need to be followed by further cuts to the PBoC's policy rates in order to result in a sustained decline in interbank rates.

With the planned scale of fiscal stimulus this year unlikely to be sufficient to stabilize growth, the PBoC will have to lean on monetary policy more than most anticipate in the coming quarters, the economist added.