Chinese Central Bank Unleashes 1 Trillion Yuan with Reserve Ratio Cut, Undertakes 100B Yuan in MLF on Same Date

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The People’s Bank of China (PBOC) has pushed through with another cut to the reserve ratio to shore up liquidity in the financial system, as the Chinese economy continues to recover from the impacts of the COVID-19 pandemic.

On 15 July PBOC reduced the reserve ratio for Chinese financial institutions by 0.5 percentage points (excluding financial institutions that are currently subject to a 5% reserve ratio), in a move which is expected to unleash approximately 1 trillion yuan.

On the same date 400 billion yuan in medium-term lending facilities (MLF) came due, prompting PBOC to undertake 100 billion yuan in MLF operations and 10 billion yuan in reverse repo operations. PBOC said that this was for the purpose of “maintaining rationally ample liquidity in the banking system, given considerable demand amongst financial institutions for medium and long-term funds and the peak of the tax-payment period.”

The rates for PBOC’s MLF and 7-day reverse repos remained unchanged, at 2.95% and 2.20% respectively.

Wang Qing (王青), chief-macro analyst with Golden Credit Ratings, said that because the reserve ratio unleashes funds without a time restriction while MLF have a term of one year, PBOC’s later round of actions had the effect of swapping between two liquidity tools and “changing the long for the short.”

According to Wang this will be of benefit to optimising the funds structure of Chinese financial institutions including banks, as well as reducing the long-term liquidity constraints on banks and strengthening their ability to extend loans.

The unchanged rate for MLF’s also indicates that the reserve ratio is a “targeted support measure directed at micro and small-enterprises and other parts of the real economy, and not at all a loosening of monetary policy.”

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