China’s central bank lowers reserve requirement

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/06

The People’s Bank of China cut the reserve requirement ratio for commercial banks on Thursday (Feb. 5). The ratio, which determines the amount of deposits a bank must hold in reserves in the central bank, was lowered by half a percentage point. Certain small banks specialised in lending to farms and small businesses, or financing water management projects, were entitled to a one-percentage-point cut. The PBoC also announced that the reserve requirement ratio for the state-owned Agricultural Development Bank of China would go down 4.5 percentage points. After the cut, the benchmark reserve ratios of the PBoC are 19.5 % for large banks, 17.5 % for small and mid-sized banks and 16 % for rural banks. The reserve requirement ratio for individual banks can vary.

The last time the reserve requirement ratio was lowered was in spring 2012. Because monetary policy in China is not yet implemented through interest-rate policy as in the developed world, the ratio is still considered a key instrument of monetary policy. China’s central bank has kept the reserve requirement ratio relatively high by world standards on concerns that easing monetary policy could e.g. result in overheating of stock markets or add to China’s debt problems. Another reason for large reserve requirements is China’s lack of a comprehensive deposit insurance scheme. The PBoC is currently drafting guidelines for the rollout of a new deposit insurance scheme, however.

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