The People’s Bank of China (PBOC) will release 400 billion Yuan (56 billion USD) of liquidity into their economy by lowering the reserve ratio for rural and small city commercial banks by one percentage point. Half the cut will take effect on the 15th of April, with the remaining cut happening May 15th.
This move is designed to encourage lending amidst the turmoil of the Coronavirus crisis eroding consumer confidence in the world’s second-largest economy. Lowering the reserve ratio is a measured and considered response to contracting economic activity, as compared to some nations pledging purchases of securities and direct lending to the private sector.
The cut in the reserve ratio aims to support smaller financial institutions whose asset quality has suffered during this economic downturn, as well as encourage banks to approve more loans to small and medium-sized businesses.
The reserve ratio required for over 4000 small and medium-sized businesses will be lowered to 6% after the cut, which will lead to an extra 100 million Yuan of long-term liquidity. Further, the PBOC cut the interest rate it pays on the excess reserves of other banks from 0.72% to 0.35%, effectively lowering interbank rates.
The PBOC as well as Chinese policy-makers have indicated more stimulus measures are to be announced soon, joining the majority of the global economy in implementing proactive fiscal easing measures.
While a reserve-ratio cut does not immediately lower the cost of borrowing in China, it is still a speedy and effective solution to free up cheap funds in order to encourage lending across the nation, and stimulate small and medium-sized businesses in China.