Reserve Ratio Cuts for Financial Inclusion Will Add 300bn Yuan in Long-term Liquidity

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Reductions in the reserve ratio requirements for Chinese banks are set to give a boost to long-term liquidity following their launch towards the end of January.

The Chinese central bank has announced that it will fully implement targeted reserve ratio reductions starting from 25 January, as part of efforts to shore up the country’s level of financial inclusion.

A senior official from the People’s Bank of China’s open markets office said that the financial inclusion reserve ratio cuts will release around 300 billion yuan in long-term liquidity.

At the end of September last year the People’s Bank of China announced conditional cuts to the reserve ratio requirement for Chinese commercial banks that would come into effect in early 2018.

Commercial banks whose financial inclusion lending percentage is at least 1.5% will enjoy a reserve requirement reduction of 0.5 percentage points starting from 2018, while those whose financial inclusion lending percentage is at least 10% will enjoy a reserve requirement ratio reduction of 1.5 percentage points.

A senior PBOC official said that the target reserve ratio reductions are intended to improve financial inclusion, and will not change the overall direction of stable and neutral monetary policy.

“The implementation of targeted reserve ratio reductions for financial inclusion establishes positive incentive mechanisms for increasing lending to financial inclusion areas,” said the official.

“This will be of benefit to expediting the tilting of financial resources towards financial inclusion and optimisation of the loan structure.

“At the same time, the liquidity released by target reserve reductions is in consonance with the needs of overall volume control, and banking system liquidity will remain essentially stable.”

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