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China announces reserve requirement ratio cut to consolidate economic recovery

Xinhua | September 15, 2023

China's central bank on Thursday said it will cut the financial-institution reserve requirement ratio (RRR) by 0.25 percentage points from Sept. 15 to consolidate the foundation for economic recovery and keep liquidity reasonably ample.

China's economy is experiencing sustained recovery, with internal forces powering economic growth continuing to strengthen and social expectations continuing to improve, according to a People's Bank of China official.

The reduction is the second RRR cut this year, and it is expected to release over 500 billion yuan (about 69.56 billion U.S. dollars) in medium and long-term liquidity, the official said.

Including the RRR cut in March, reductions this year total 0.5 percentage points and could release over a trillion yuan in medium and long-term liquidity, the official added.

Wen Bin, chief economist of China Minsheng Bank, said that China still faces insufficient internal economic vitality and inadequate demand. He noted that lowering the RRR can guide financial institutions to increase their support for the real economy and boost market confidence in an improved manner.

As approximately 2.8 trillion yuan of medium-term lending facility (MLF) loans are maturing from August to December, Wen said that cutting the RRR is necessary to ensure reasonable liquidity in the market, lower the liability costs for financial institutions, and replace the maturing MLF loans.

The RRR cuts are also conducive to maintaining a loose and favorable financial environment to reducing debt costs as the country moves to resolve hidden local government debt, according to Wen.

After the reduction, the weighted average RRR for financial institutions will be around 7.4 percent, according to a statement released by the central bank.

The central bank said that the cut will not apply to financial institutions that have already implemented a 5 percent RRR.

The latest RRR cut of 0.25 percentage points is a continuation of the overall reduction that began last year, Wen said, noting that the 5 percent RRR is the current lower limit of the RRR.

Considering this lower limit, there remains "significant room for monetary policy adjustment," Wen noted.

The central bank said it would make prudent monetary policy precise and effective, keep liquidity reasonably ample, maintain moderate credit growth, and ensure money-supply momentum and social financing in line with nominal economic growth.

The central bank will also improve monetary policy support for key areas and weak links, keep the exchange rate stable, and support the sustained recovery of the real economy.