China's central bank announced on Friday it would cut the reserve requirement ratio (RRR), the amount of cash financial institutions must hold in reserves, to retain appropriate levels of liquidity and support the real economy. 

The new RRR, to be reduced by 0.25 percentage point or 25 basis points (bps), will be effective March 27. After the latest cut, the first in 2023, takes effect, the average reserve ratio will be further reduced to 7.6 percent, according to the People's Bank of China (PBOC).

The latest cut will not apply to financial institutions with an existing reserve ratio of 5 percent, said the PBOC.

The previous RRR cut took effect December 5 last year. The central bank has cut the RRR 15 times since 2018.

The RRR cut safeguards Chinese economy: experts

"This move is a very important signal to the global market, " Liu Zhiqin, a senior fellow at the Chongyang Institute for Financial Studies of Renmin University of China, told CGTN's Global Business.

Liu said that the RRR cut safeguards China's banking system, financial sector and the overall economy when the banks in U.S. and Europe are currently facing turmoil.

"The RRR cut is a reliable measure to facilitate more effective support for China's real economy by financial institutions, and keep the liquidity adequate," said Pang Ming, chief economist for Greater China at JLL. "The move is expected to free up about 600 billion yuan ($87 billion)," Pang added. 

PBOC to pursue sound monetary policy in targeted and effective manner

In a statement released on Friday, the PBOC vowed to pursue sound monetary policy in a targeted and effective manner. The central bank said it will better utilize the role of monetary policy instruments.

The PBOC said it will keep the money and credit supply moderate and stable, and keep liquidity adequate and at a reasonable level. It will also maintain the growth of money supply and the aggregate financing to the real economy to be basically in line with the nominal GDP growth.

The central bank said it is keeping an eye on better support of major areas and the weak links in the Chinese economy. It said it will refrain from launching a deluge of strong stimulus policies and properly balance internal and external factors to promote high-quality economic development.

(Cover: China's central bank headquarters in Beijing, China, February 26, 2023. /CFP)