China decided to free up $188 billion for banks in the second reserve ratio cut this year

December 7, 2021: On Monday, China’s central bank said it would cut the number of cash banks must hold in reserve, its second move this year, releasing 1.2 trillion yuan in long-term liquidity to bolster slowing economic growth.

The People’s Bank of China (PBOC) said on its website it would cut the reserve requirement ratio (RRR) for banks by 50 basis points (bps), effective from December 15.

The second-largest economy of the world, which staged an impressive rebound from the previous year’s pandemic slump, has lost momentum in the last months as it grapples with the slows manufacturing sector, debt problems in the property market, and persistent Covid-19 outbreaks.

The government has set a modest annual economic growth target, at above 6%, for this year, which comes the pandemic-stricken 2020.

The cut, the second this year after a broad-based reduction in July, was flagged by Premier Li Keqiang as a way to step up support for the economy, tiny firms.

The cut will not apply to financial institutions with an existing RRR of 5%. The weighted average RRR for financial institutions would be at 8.4% after the new reduction.

The RRR for large banks, which considers the preferential policy of targeted cuts for inclusive financing, is currently at 10.5%.

Some of the funds released will be used to repay matured medium-term lending facility loans, according to PBOC, reaffirming a stance of not resorting to “flood-like” stimulus.

The central bank guided financial institutions to use the released funds to actively support the real economy, tiny firms.

The RRR cut will reduce the funding cost of financial institutions by about 15 billion yuan per year, helping lower financing costs of firms, it added.

Advisers to China’s government will recommend authorities set a 2022 economic growth target lesser than 2021, giving policymakers more room to push structural reforms.

China’s politburo, a top-decision-making body of the ruling Communist Party, said on Monday that it would keep economic operations within a reasonable range in 2022 and promote the healthy development of the property sector, the official Xinhua news agency said.

China’s move to wean property developers away from rampant borrowing has translated into loan losses for banks and pain in credit markets. It worsened a liquidity crisis at developer China Evergrande and other real estate firms.

On Friday, the authorities said they would step in and oversee risk management at the company.