The People’s Bank of China (PBOC) reduced the reserve requirement ratio (RRR) for financial institutions by 0.25 percentage point on March 27 to keep liquidity in the banking system at a reasonably level. The one-year loan prime rate was kept unchanged at 3.65%. Continuous policy measures to protect China’s economic recovery from external uncertainties can be expected after the country’s central bank strengthened policy support with a cut in financial institutions’ required reserves, experts said. The decision to cut the RRR, which determines the amount of cash that banks must hold as reserves, has delivered a clear signal that Chinese policymakers are keen to maintain macro-economic policy support amid rising global financial volatility and economic downside risks, they said. The move is estimated to release about CNY500 billion into the market, helping stabilize borrowing costs and strengthen domestic banks’ ability to counter any spillover of rising global financial risks, experts said.
“More importantly, the cut sends a signal that policymakers are taking a proactive approach to support the economy, as the relaxation comes even as economic and financial data is picking up,” said Zhong Linnan, Senior Macro-economic Analyst at GF Securities. More support in terms of monetary, fiscal and industrial policies may be in the pipeline, Zhong said, noting that the central bank has stressed that the cut is part of “an optimal combination of macro policies” to serve the real economy. Experts said it is possible that loan prime rates – China’s market-based benchmark lending rates – may slightly decline this year and help bolster domestic demand.
Yan Se, Associate Professor of Applied Economics at Peking University’s Guanghua School of Management, said that China’s monetary policy is expected to remain relatively accommodative this year to expand domestic demand and consumption, which will be key to off-setting the downside risks facing exports because the stress on the international banking system can hinder global credit expansion and impair economic growth. As the U.S. Federal Reserve and other central banks have raised interest rates at the fastest pace in years to curb inflation, a growing number of banks are caught in a liquidity strain. Following the failure of U.S. lenders Silicon Valley Bank and Signature Bank, Swiss bank Credit Suisse reached a rescue deal for UBS to acquire it for CHF3 billion, the China Daily reports.