China cuts banks’ Reserve Requirement Ratio

China’s central bank said Friday that it will lower the amount of deposits banks have to set aside, releasing 500 billion yuan ($69.91 billion) of liquidity into an economy struggling with its worst Covid-19 outbreak since 2020.

The People’s Bank of China said it will cut banks’ reserve requirement ratio by 0.25 percentage point, which will bring the weighted average RRR level for the whole banking system to 7.8%.

The State Council, China’s cabinet on Wednesday pledged to use more monetary tools, including timely cuts in banks’ RRR, to keep liquidity reasonably ample.

The RRR cut, effective Dec. 5, can help the nation’s lenders save CNY5.6 billion in annual funding costs, the central bank said.

The world’s second-largest economy is grappling with a broad-based slowdown stemming from the government’s efforts to stamp out widespread Covid-19 outbreaks, along with a deepening property slump and sinking global demand for its products.

Earlier this month, Beijing relaxed some pandemic restrictions and unveiled a rescue plan for the beleaguered property sector, measures that many analysts said will have a limited effect in helping lift the economy.

The RRR cut, some analysts said, will also have limited positive impact, as China’s zero-Covid strategy remains the real hurdle for the economy. Record-high coronavirus cases in recent days have forced many local governments to dial back a short-lived loosening of pandemic curbs.

With inflation at bay, China’s central bank has taken a measured policy stance this year, diverging from rate increases globally to fight high inflation. To support the economy, Beijing has instead resorted to fiscal stimulus to prop up infrastructure investment while vowing to avoid “flood like” stimulus.

Some economists said Beijing will likely refrain from any big easing move this year, as the Chinese yuan has been under mounting depreciation pressure, faced with a stronger U.S. dollar. The central bank on Monday left its benchmark lending rates unchanged from the previous month.

The PBOC previously cut the RRR by 25 basis points in April, when financial and manufacturing hub Shanghai was forced into a citywide lockdown that confined millions to their rooms or quarantine centers for two months.

China’s central bank has cut the RRR 13 times since 2018, reducing the average reserve ratio to about 8% from 15%, injecting about CNY10.8 trillion of liquidity into the economy, PBOC Gov. Yi Gang said earlier this month.

In Wednesday’s cabinet meeting, policy makers also urged banks to lower funding costs for small and medium enterprises and support bond issuance by private businesses.

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