China to Free Up 1 Trillion Yuan

2021-07-09, the People’s Bank of China cut its reserve requirement ratio (RRR)for financial instiutions from 2021-07-15 by half a percentage point. The move will unleash 1 Trillion yuan ($154 billion) of long-term liquidity. Most banks will allow to maintain a reduced average ratio of 8.9%.

The reserve ratio is the portion of a commercial bank’s liabilities that it must hold onto against possible losses, rather than lend or invest.

After China’s sharp economic recovery in the first half, some economists now expect second-half economic growth to drop to about 5 to 6 per cent, with domestic consumption weak and small firms are under pressure from rising costs. The Chinese economy could be at risk of a capital outflow if the US raises interest rates in an effort to tighten rapid recovery in its market.

PBOC reiterated that its monetary policy stance had indeed not changed, and that the RRR cut was partly intended to prevent a tightening in liquidity conditions due to the upcoming tax season and a withdrawal of funds via its medium-term lending facility.

“It is just a routine operation after monetary policy normalisation, aimed at optimising the funding structure of financial institutions and therefore facilitate their better financing support for the real economy,” the PBOC said.

“The prudent monetary stance doesn’t change.”

The decision followed Premier Li Keqiang calling for more tools to support small businesses, which have been plagued by rising costs.
New data from the National Bureau of Statistics on Friday also showed that factory-gate price inflation in China remained high in June, falling slightly from a near 13-year high in May.

The producer price index (PPI), which reflects the prices that factories charge wholesalers for their products, rose by 8.8 per cent in June from a year earlier, down from a gain of 9 per cent in May.

Reference:

South China Morning Post, 2021-07-11, “China freeing up 1 trillion yuan will help support businesses, but impact seen as ‘negligible’ to economy in near-term”