China Central Bank announce rates cuts, frees up about $79 billion for market

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China’s central bank announced Friday it will cut the reserve requirement ratio (RRR) for some banks effective March 16 to boost lending support for small companies that have been hit hard by the coronavirus outbreak.

The People’s Bank of China (PBOC) announced RRR cuts by 0.5 to 1 percentage points for qualified banks. Qualified joint-stock commercial banks will be eligible for an additional 1 percentage point RRR cut.

In total, the PBOC will release 550 billion yuan (78.76 billion U.S. dollars) in an effort to support the development of the real economy and reduce social financing cost in the field of inclusive finance, which mainly covers financial institutions’ services for small businesses, farmers, low-income households, people with disabilities and senior citizens.

The proactive move will effectively increase banks’ source of funds to support China’s real economy, according to the PBOC.

“It directly reduces the cost of interest payments of relevant banks by approximately 8.5 billion yuan each year,” said an official with the PBOC.

“Through banks it can help promote the reduction of the actual interest rates of small and micro enterprises thus supports the real economy.”

Such cuts will help boost lending to small firms and private businesses, and reduce their financing costs to help them resume operations, according to a statement issued on Tuesday after a meeting of the State Council chaired by Premier Li Keqiang.

What does this mean for the market?

The RRR cuts are in accordance with expectations, said Lian Ping, director of the China Banking Association’s Industry Development Research Committee and president of the China Chief Economist Forum.

Although in terms of long-term funds, 550 billion yuan is not a large amount of funds, it also brings a certain increment, which can maintain a reasonable and sufficient liquidity for the total market liquidity, Lian said.

“It plays a positive role in maintaining the stability of the operation of the capital market, improving people’s expectations about the future and enhancing the monetary policy’s support to the operation of the real economy.”

Under the circumstances of relatively large external pressures, China’s monetary policy continues to move in a more flexible direction, and it will continue to adhere to it for a period of time, Lian added.

“The monetary policy’s role in the operation of the entire economy will gradually manifest.”

The PBOC has been working on cushioning the blow of the outbreak on China’s economy, cutting the benchmark lending rate and making cheap subsidized loans to encourage bank lending to selected firms.

To help businesses weather the epidemic, China granted special re-lending funds of 300 billion yuan (43.16 billion U.S. dollars) to help small and micro enterprises, and later the central bank increased their re-lending and re-discount quota by 500 billion yuan to help medium-sized, small and micro enterprises.

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