China lowers bank reserve requirements

An across-the-board 0.5 percentage-point cut in the bank reserve requirements ratio (RRR) came into force on Monday (Sep. 16). The average RRR (not including bank-specific exemptions) now stand at 13 % for large banks, 11 % for mid-sized banks and 7.5 % for small banks.

The RRR for smaller regional banks will also drop by a total of 1 percentage point in two steps (October 15 and November 15). The action should support growth in the real economy by reducing financing costs and improve access to financing for smaller firms. A goal of the recent reference rate reform is also to lower bank lending rates (BOFIT Weekly 34/2019).

Reserve requirements were lowered several times since April 2018, when the RRR for large banks was 17 %. China’s monetary policy stance otherwise remains unchanged. For example, the central bank’s rates in its open market and lending operations are untouched. No significant changes have been reported in money-market rates.

Setting monetary policy in China involves balancing the demands of domestic pressures to support economic growth and external pressures to combat exchange-rate depreciation and capital outflows from the country. Monetary easing also fuels indebtedness, which has already reached levels that threaten China’s economic development. The People’s Bank of China reports that it now uses targeted monetary stimulus rather than broad measures.