The People's Bank of China (PBoC) announced to cut the reserve requirement ratio (RRR) for financial institutions or the level of cash that lenders must hold as reserves by 50 basis points starting Jan. 6 - Photo: Privacy

JAKARTA (TheInsiderStories) – The People’s Bank of China (PBoC) announced to cut the reserve requirement ratio (RRR) for financial institutions or the level of cash that lenders must hold as reserves by 50 basis points starting Jan. 6, Xinhua News reported on Jan. 1. The move was expected to offset the liquidity shortage ahead of the Chinese Lunar New Year and to keep overall liquidity in the banking system basically stable.

Referring to the reduction as part of the country’ counter-cyclical adjustments, the official stressed that the stance of prudent monetary policy has remained intact and excluded the possibility of “flood-style” stimulus.

According to the PBoC, the blanket RRR cut will release about RMB800 billion (US$114.86 billion) of long-term funds, injecting liquidity and lowering financing costs for the real economy. With more than RMB120 billion in long-term funds to be unlocked for small and medium-sized lenders.

Last week, Chinese Premier Li Keqiang promised to grant stronger support to small and medium-sized banks delivering direct services to small and micro-enterprises during an inspection tour in Chengdu, capital city of the southwestern province of Sichuan, saying that research into the use of multiple tools including the RRR will be carried out.

The cut also echoed the central bank‘ pledge made Wednesday morning during a meeting where it vowed to advance financial supply-side structural reform for high-quality development and guide financial institutions to step up loans to the real economy.

While acknowledging the positive effects of the cut on market sentiment, Asian financial service group Nomura expected more liquidity to be unleashed in the future as the move might not be sufficient to fill in the liquidity shortage in January.

UBS also anticipated another RRR cut over the rest of 2020 as part of the country’s efforts to boost credit growth but denied the possibility of a big stimulus.

The year-end tone-setting Central Economic Work Conference last month noted that the country faces rising downward economic pressure amid intertwined structural, institutional and cyclical problems, pledging stronger policy moves to keep the economy on a stable track.

The country’ GDP expanded 6.2 percent year on year in the first three quarters of 2019 despite domestic headwinds and external uncertainties.

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