China cuts banks’ reserve ratio for second time in 2023 to aid recovery

BEIJING  –China‘s central bank said on Thursday it would cut the amount of cash that banks must hold as reserves for the second time this year to boost liquidity and support the country’s economic recovery.

The People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for all banks, except those that have implemented a 5-percent reserve ratio, by 25 basis points from Sept. 15.

The reduction follows a 25-bps cut for all banks in March and comes as the world’s second-biggest economy is struggling to sustain a post-pandemic recovery.

China‘s economy is facing sluggish demand, and “the RRR cut can better guide financial institutions to increase support for the real economy and boost the confidence of market players,” said Wen Bin, chief economist at Minsheng Bank.

The move is expected to free up over 500 billion yuan ($68.71 billion) for medium to long term liquidity, an official at the central bank was cited by state media Xinhua as saying.

The central bank said the weighted average reserve requirement ratio (RRR) for financial institutions stood at around 7.4percent after the cut.

China‘s offshore yuan weakened after the decision, lifting the dollar to 7.2921 against the yuan, up 0.3percent on the day.

To support the economy, the government has rolled out a series of policy measures in recent months, including steps to spur housing demand.

In the statement, the central bank also promised to make its policy “precise and forceful” to support the economy and keep yuan exchange rate basically stable.

Xu Tianchen, senior economist at the Economist Intelligence Unit, said the government was keen to support the economy given the risk to its 5percent GDP growth target for this year.

The statistics bureau will release key economic figures for August including retail sales, industrial output and property investment on Friday.

Dan Wang, chief economist at Hang Seng Bank China, cautioned to watch for a cut in Medium-term Lending Facility (MLF) on Friday off the back of the RRR cut.

“That would be more significant than the RRR cut and suggest central bank is up to something,” said Wang.

($1 = 7.2770 Chinese yuan renminbi)