Tuesday, May 26, 2020

China cuts reserve ratio for large banks another 150 bps

     China's central bank, the People's Bank of China (PBOC), has lowered its reserve requirement for all large financial institutions by another 150 basis points to 11.00 percent, its second cut this year following a 50-point cut in January.
     China's large financial institutions include its four big banks: the Industrial & Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China and the Bank of China.
     PBOC's cut in the reserve requirement on May 25 comes after China last week for the first time since 2002 dropped a annual target for economic growth, with Premier Li Keqiang saying the target was mainly scrapped because of the uncertainties from the global epidemic and trade, and the country's development is facing some unpredictable factors, according to news reports.
     Last year China targeted 6 to 6.5 percent annual economic growth, down from about 6.5 percent the previous year, reflecting the steady decline in growth since 14.2 percent in 2007.
    The cut to the reserve ratio came the same day Yi Gang, governor of PBOC said in a newspaper interview the country would continue to strengthen its economic policy and its efforts to lower interest rates.
     China has cut is benchmark interest rate, the Loan Prime Rate (LPR), twice this year by a total of 30 basis points and it currently stands at 3.85 percent.
     China's gross domestic product shrank 9.8 percent in the first quarter from the previous quarter and by 6.8 percent compared with the same quarter in 2019.
     In the interview Yi also said PBOC's measures since the outbreak of the coronavirus had amounted to 5.9 trillion yuan comprising cuts to reserve ratios and other lending facilities.
     In March China's state council, which is chaired by Premier Li, called on further reductions in the reserve requirement for both small and medium-sized banks, with PBOC on March 13 then lowering the reserve ratio by 50 to 100 basis points for banks that met inclusive financing targets.
     Since 2018 PBOC has cut its three different reserve ratios 12 times, releasing some 8 trillion yuan in long-term funds, of which 1.75 trillion yuan were released this year following three cuts this year, PBOC said in a statement.
     This includes the last cut to the reserve ratio of large financial institutions on Jan. 2, 2020, which freed up 800 billion yuan in funds, and the last cut to the reserve ratio of small banks that took place in two stages, each of 50 basis points, on April 15 and then May 15, freeing up 400 billion yuan.
     PBOC operates three different reserve ratios: one for large banks, which includes the state-owned banks; one for mid-sized banks, which include join-stock banks, and one for small banks, such as 4,000 rural banks, rural cooperative banks, credit cooperatives and village and town banks.
     As of May 15, the average reserve ratio of financial institutions was 9.4 percent, a decrease of 5.2 percentage points since the start of 2018
     PBOC today also announced its first liquidity injection since late March via a 7-day reverse repo operation of 10 billion yuan at an unchanged 2.20 percent, saying this was "in order to keep the liquidity adequate at a reasonable level in the banking system."



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