China’s central bank said on Friday that it will reduce the liquidity that financial institutions must hold in reserve and release about 1,000 billion yuan ($ 154.24 billion) in liquidity as of Thursday, a move expected to improve. support the real economy and maintain the costs of financing businesses. at a low level.
The People’s Bank of China said in a statement that it will reduce the reserve requirement ratio by 50 basis points for qualifying financial institutions, excluding those that have already kept the ratio low at 5%.
This move does not mean moving away from “cautious” monetary policy, the PBOC said, stressing that the reduction in the RRR is a regular measure following the return of China’s monetary policy to normal status in the United States. first semester of this year.
Part of the funds released will be used by financial institutions to repay their loans through the so-called medium-term loan facility and part will be used to counter the liquidity shortage that could arise at the end of July due to a peak in payments. taxes, says the PBOC.
The liquidity of the Chinese banking system will generally remain stable, the PBOC said, citing the stable growth dynamics of the country’s economy. He also stressed the need to maintain both the stability and the effectiveness of the country’s monetary policy and to refrain from any massive stimulus.
“We don’t expect a broader shift towards easing monetary policy,” said Louis Kuijs, head of Asian economics at Oxford Economics, a UK think tank. “A reduction in the RRR should help maintain sufficient liquidity in the financial system and possibly lead to lower interbank interest rates.”
The reduction in the RRR will save about 13 billion yuan in costs for financial institutions each year, thereby helping to reduce financing costs for everyone, according to the PBOC statement.
This decision aims to optimize the capital structure of financial institutions and improve their services to support the real economy while maintaining adequate liquidity. It will also adjust the financing structure of the PBOC and increase the long-term stable capital resources of financial institutions to support small and micro enterprises.
The moderate level of inflation – indicated by the June consumer price index of 1.1%, down from 1.3% in May – gave more leeway to reduce the RRR. And inflation should be under control in the second half of the year, said Wen Bin, chief researcher at China Minsheng Bank.
The central bank also released important financial data on Friday. Total social finance, or the total funding resources injected into the real economy, increased by 17.740 billion yuan in the first six months. Social finance outstanding increased 11% year-on-year to reach 301.5 trillion yuan.
New Chinese yuan-denominated loans totaled 2.12 trillion yuan in June, up 308.6 billion yuan year-on-year. The broad money supply, or M2, which covers cash in circulation and all deposits, grew 8.6% on an annual basis to reach 231.780 billion yuan at the end of June, according to the PBOC.
Externally, the US Federal Reserve, the US central bank, has already adjusted monetary policy, and the risk of global stagflation could increase, according to some projections. Cheng Shi, chief economist and managing director of ICBC International, predicted that the PBOC may see the domestic situation as a priority in deciding its monetary policy and the country’s liquidity level, despite some uncertainties globally.
âWe don’t think the PBOC will officially cut its policy rates in the second half of 2021,â Kuijs said. “With CPI inflation expected to remain under control, we also don’t see the need for higher policy rates anytime soon,” he added.