The Chinese central bank has implemented another targeted reduction of the required reserve ratio, unleashing around 700 billion yuan (approx. USD$140 billion) in liquidity for lenders
The People’s Bank of China (PBOC) announced in an official statement on Sunday that the required reserve ratio for certain categories of Chinese banks will fall by 0.5 percentage points as of 5 July.
According to PBOC the goal is to provide greater financial support to small and micro-enterprises, as well as advanceChina’s debt-to-equity swap program.
Chinese lenders that will benefit from the reduction include major state-owned commercial banks, joint-stock commercial lenders, postal banks, municipal commercial banks, rural banks and foreign-invested banks.
500 billion yuan of the funds released will be used by China’s big five state-owned banks and 12 joint-stock commercial lenders for debt-equity swaps, in order to reduce the debt burden of enterprises and improve the health of balance sheets.
The remaining 200 billion yuan will be allocated to smaller lenders who are more inclined to lend to small businesses, as part of efforts to shore up financial inclusion.
According to PBOC the move will help to “advance the steady progress of structural deleveraging, and strengthen support to the weak links of small and micro-businessses.”
The central bank stressed, however, the going maintenance of a “prudential and neutral monetary policy.”
“The RRR cut this time doesn’t change the PBOC’s prudent policy stance,” said Wen Bin, a researcher at China Minsheng Bank, to Bloomberg.
“It is also an innovative move and addresses structural problems, as the central bank ordered the lenders to use the money unleashed to push forward debt-to-equity swaps and support small and micro-sized businesses.
“This can help relieve financial burdens for some companies while reducing leverage.”
State-owned media flagged a further reduction in the required reserve ratio last week, following the implementation of a targeted cut at the end of April that sought to shore up financial inclusion and help commercial lenders to pay off medium-term lending facilities (MLF).