In order to maintain ample liquidity and support a nascent economic recovery, China’s central bank announced on Friday that it would reduce the amount of cash that banks must hold as reserves for the first time this year.

Chinese leaders have committed to increasing support for the second-largest economy in the world, which is gradually emerging from a pandemic-induced slump following the abrupt lifting of coronavirus-related curbs in December.

The People’s Bank of China (PBOC) announced that starting on March 27, it would reduce the reserve requirement ratio (RRR) for all banks by 25 basis points, with the exception of those that have implemented a 5% reserve ratio.

The action, which was taken earlier than expected by the financial markets, was prompted by data showing that the economy recovered gradually but unevenly in the first two months of the year and that credit expansion was stronger than anticipated.

“At present, risks in the overseas banking sector are increasing and global liquidity is under pressure, and the external environment is becoming increasingly complex,” said Wen Bin, chief economist at China Minsheng Bank.

“In the first two months of this year, China’s main economic indicators showed a positive trend, but the overall recovery foundation is not yet solid.”

The amount of long-term liquidity that will be released after the cut, which will enable banks to lend out more money, has not yet been estimated by the central bank.

According to analysts, the action released over 500 billion yuan ($72.6 billion).

This year, the central bank has pledged to implement “precise and forceful” policy in an effort to support the economy by maintaining a healthy level of liquidity and bringing down the cost of business financing.

The reduction, according to the statement, was made in order to “make a good combination of macro policies, improve the level of services for the real economy, and keep liquidity in the banking system reasonably sufficient.”

Li Qiang, China’s new premier, has vowed to push for economic growth while avoiding any significant risks, state media reported on Friday.

The decrease comes after a 25 bps cut in December for all banks.

Yi Gang, the head of the central bank, stated at a news conference on March 3 that China’s real interest rates are at a suitable level and that lowering the reserve requirements for banks will continue to be a successful economic stimulus.

Since 2018, the PBOC has decreased the RRR from nearly 15%, and some analysts have questioned how much more room there is for reductions.

“This will provide a bit of financial relief for China’s large and medium-sized banks,” Julian Evans-Pritchard at Capital Economics said in a note.

“It may also help nudge down lending rates slightly. But given the wider signs of policy restraint, we doubt it will have a significant and lasting impact on monetary conditions or credit growth.”

After the reduction, the weighted average RRR for financial institutions was approximately 7.6%, according to the central bank.

In the first two months of 2023, China’s economy expanded as a result of increased infrastructure spending and consumer spending, which helped the country recover from COVID-19’s disruptions. However, its other conventional growth drivers are highly speculative: In the midst of a global recession, exports are predicted to remain weak, and the crisis-stricken real estate market is just now starting to recover.

After slowing to only 3% last year, one of the weakest showings in nearly 50 years, China has set a modest goal for economic growth this year of around 5%.

(Adapted from FinancialPost.com)

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