The People's Bank of China (PBOC) said on Friday it will cut the reserve requirement ratios (RRR) by 0.5 percentage point from July 15, releasing about 1 trillion yuan ($154 billion) in liquidity to bolster the real economy.
The move aims to optimize the capital structure of financial institutions, improve financial service capabilities and better shore up the real economy, the central bank said in an online statement.
The RRR cut, which will be imposed on all financial institutions except those that have already held the ratio at 5 percent, will likely release 1 trillion yuan in long-term funds, the PBOC said.
After the reduction, the weighted average reserve requirement ratio for Chinese financial institutions will stand at 8.9 percent, the central bank added.
"Allowing for the pressure on some micro and small enterprises from rising commodity prices since the start of the year, China will back up these market entities with stable and effective monetary policies and fend off flood-like stimulus," PBOC said.
The PBOC claimed that liquidity in China's banking system will still be generally steady and the direction of the country's monetary policy has not changed.
The last RRR cut by the bank came amid the first wave of COVID-19 in April 2020 when the country tried to shore up its economy.
Four RRR cuts in 2018 released 3.65 trillion yuan, five RRR cuts in 2019 released 2.7 trillion yuan, and three RRR cuts in the first five months of 2020 released 1.75 trillion yuan.
Against the backdrop of global supply shocks causing all-around stagflation risks and Federal Reserve policy adjustments, the Chinese monetary authority has maintained its focus and fully grasped the relative advantage of monetary policy in a normal range, Cheng Shi, chief economist and managing director of ICBC International, told CGTN.
"We believe that the timely and appropriate adjustment of China's monetary policy will help the Chinese economy seek a dynamic and optimal balance between steady growth, inflation control, risk-aversion and reforms under external and internal pressures," Cheng said.
"The Chinese government's suppression of credit demand from real estate and government departments may be the main reason for the decline in interest rates in the first half of the year. We believe that China's RRR cut will not intensify the pressure of capital outflows," according to a note from GAIN Capital.
"It is a hard task for the Fed to cut back on high deficit rates sharply and rapidly, as compared to limited pressure on emerging markets such as China which therefore have large room to maneuver," the note said.
(With input from Xinhua)