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China Cuts Small Banks' Reserve Requirement Ratio

centarlbkchina june25 03apr20 lt

China's central bank decided to reduce the reserve requirement for small and medium-sized banks by 100 basis points to improve liquidity and shore up the economy hit by the outbreak of coronavirus.

The People's Bank of China, said on Friday, that it will cut the reserve requirement ratio by 50 basis points each on April 15 and May 15.

The reduction will release CNY 400 billion liquidity into the financial system. The latest RRR cut was the third so far this year.

The reserve ratio will fall to 6 percent for about 4,000 medium and small-sized banks.

Further, the central bank lowered the interest rate paid on excess reserves that lenders maintain with the PBoC, to 0.35 percent from 0.72 percent, with effect from April 7.

Frequent targeted RRR cuts that release long term liquidity to the market mean that longer-term interest rates should fall, if global risks do not increase suddenly, Iris Pang, an economist at ING said.

Though this would not benefit SMEs, which are the most in need, it will ease the interest costs of other corporates that could contribute to the recovery of the economy, even if liquidity is already ample, the economist noted.

Pang said even though more targeted RRR cuts for smaller banks, and rate cuts on the 7-day, 1-year Medium Lending Facility and 1-Year Loan Prime Rate are expected, these policies would be more beneficial to solid companies, as their credit profiles are much better than smaller ones.

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