Move will ease liquidity ahead of new rules
The cut in the reserve requirement ratio (RRR) announced earlier by the People's Bank of China (PBOC) became effective on Wednesday. The move will cushion the effect of the coming new rules to regulate asset management products, experts said.
The PBOC, the country's central bank, announced on April 17 that it would cut the RRR for banks, except policy lenders such as China Development Bank, by 1 percentage point to help small businesses get financing, and to improve overall stability and liquidity in the economy.
About 900 billion yuan ($142.60 billion) of the funds released from the RRR cut will be used to pay back medium-term lending facility (MLF) operations, while the remaining 400 billion yuan will be injected into the banking system, according to a statement published on the PBOC's website on April 17.
Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times Wednesday that before the cut, the RRR level of 17 percent for large institutions and 15 percent for smaller banks was high because of the need to control the over-rapid growth rate of credit loans.
"A ratio between 8 to 12 percent will be appropriate in the long term, so there is plenty of room to make adjustments in a downward trend," Dong said.
The newly released liquidity from the RRR cut spurred wide discussion about whether it signals a change in direction toward an easing of monetary policy, which could have an effect on housing prices, although the PBOC has earlier stated that it would maintain a prudent and neutral monetary policy.
"In the short term, the RRR cut will be used for the purpose of paying back MLF operations and providing loans for small and micro companies, but it is set to generate more money supply in the market," Dong noted.
Liu Xuezhi, a senior analyst at the Bank of Communications, told the Global Times Wednesday that the PBOC move is part of the financial work adjustment amid the country's bid to win the "three tough battles" of preventing financial risks, reducing poverty and tackling pollution.
"Freeing up more liquidity is very likely aimed at making preparations for the new rules on regulating asset management products, the rollout of which will continue the strengthening of financial regulation," Liu said.
The new rules might be released at the end of April or the start of May, sources close to the PBOC told domestic news outlet Caijing on Wednesday, which will reduce overall liquidity for banks.
In November 2017, the PBOC issued draft rules for the asset management sector to fend off systemic financial risks.
"In this sense, the RRR cut can have a hedging function against the negative effects on economic growth from the lack of liquidity due to the tightening rules," Liu noted.