Saturday, February 18, 2012

People's Bank of China Cuts RRR 50 basis points

The People's Bank of China (PBOC) announced a 50 basis point reduction in the required reserve ratios (RRR) for deposit taking financial institutions, effective 24th February 2012.  The new required reserve ratios will average 20.50% for large banks, and 18.50% for small banks.  The move is expected to add as much as 400 billion yuan of liquidity to the financial system.  The move marks a shift in the policy bias to loosening, with the PBOC previously being content to use open market operations to adjust liquidity, in contrast to the higher profile RRR.

The last reduction in the RRR was a 50 basis point cut in December last year, while the People's Bank of China last raised the reserve requirements by 50 basis points in June 2011 to peak at an average 21.50% for large banks, and 19.50% for small banks.  The PBC also adjusted the reserve requirement rules in August, effectively resulting in tightening of about 100bps.  Meanwhile the People's Bank of China last raised the benchmark interest rate 25bps to 6.56% in early July last year.  

China reported annual inflation of 4.5% in January, spiking due to seasonal effects from a low of 4.1% in December, but down from a high of 6.5% in July last year.  Meanwhile the Chinese economy grew an annual 8.9% in the December quarter (9.1% in Q3, 9.5% in Q2).  The Chinese Yuan (CNY) has appreciated by just over 4% against the US dollar over the past year, with the USDCNY exchange rate last trading around 6.30.


  1. Will be watching closely for any follow up moves on this; inflation hasn't fully receded yet, so this must be pre-emptive... does it mark a reverse course on housing market tightening? I note that the Chinese authorities recently told financial institutions to rollover local government debt (averting funding/solvency issues), is this a follow up move on that front?

  2. I se I'm number two today. All that I would like to say ia that this is all Greek to me.

  3. It's all Greek to me, but the subject should be of particular interest. To gain a proper understanding is daunting. I've already apologized to my sources for not reading the stuff about Chinese banking. I think I would need to read a book. It's daunting. If this subject should pop up again on this site, you never know wether I've got something to say.

    1. It's certainly worth reading up on the Chinese banking system. If you're interested in learning more about the RRR click on the second link in the article above - it will take you to a summary of an article on the RRR by the Bank for International Settlements. The IMF also recently put out a very good resource, the financial stability report for china, it's also well worth a read for learning about the Chinese banking system.