China's RRR cut a breakthrough in policy tools
By CGTN's Han Jie
["china"]
China's latest cut to the amount of cash lenders must hold as reserves is a breakthrough policy tool, an economist with Credit Suisse said, adding there are no changes in the country's monetary policy. 

China announces targeted RRR cut for inclusive financing 

China's central bank the People's Bank of China (PBOC) has announced a targeted reduction in the reserve requirement ratio (RRR) to encourage commercial banks to improve credit support for small businesses, impoverished groups and agriculture, among others.
The central bank said it will reduce the amount of cash that lenders must hold as reserves from next year, with the size of the cut linked to the flow of funding to parts of the economy where credit is scarce. 
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The reserve requirement rate will be cut a further 50 bps to 150 bps from the benchmark RRR rate for banks that meet certain requirements for lending to the targeted sectors, the PBOC said.
Banks whose "inclusive financing" accounts for more than 1.5 percent of their total loans will enjoy a 0.5 percentage point RRR cut, while those with such loans exceeding 10 percent will have an additional 1 percentage point cut. 
The move will free up about 600 billion yuan (90 billion US dollars) of funding, Ming Ming, head of fixed-income research at Citic Securities Co in Beijing and a former PBOC official said. 

The RRR cut doee not change the country's overall monetary policy stance 

The cut, which goes into effect in 2018, is a structural adjustment that does not change the country's overall monetary policy stance, the central bank explained, stressing that it would continue to implement "prudent and neutral" policy to guide reasonable credit and financing growth. 
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"Instead of taking effect immediately as usual, it leaves a three-month gap, which is a policy innovation," said Tao Dong, managing director and chief economist of Credit Suisse in Asia, adding it is the first time China has left a gap between announcement and implementation. 
In the final quarter of 2017, banks will be inspired to channel more energy into inclusive finance to meet these requirements, Tao said. "Whether, and to what extent, a bank can enjoy the favorable policy depends on its effort," Tao said.
The RRR cut announcement came after data showed the manufacturing sector in September expanded at the fastest pace in more than five years, easing concerns over a loss of momentum in the world's second-largest economy.
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The RRR cut will keeps the yuan exchange rate "basically stable" 

A lower RRR means lenders can offer more loans and earn higher incomes from interest. Analysts estimate the PBOC's move will lead to more than 100 billion US dollars pumped into the real economy.
A targeted cut taking effect in three months means the central bank "doesn’t think there’s a big need to adjust monetary policy," and that deleveraging remains crucial as the economy hasn’t shown any signs of deterioration, said Zhou Hao, an economist at Commerzbank AG in Singapore. 
The manufacturing purchasing managers' index for this month stood at 52.4, up from 51.7 in August and above the 50-point mark that separates expansion from contraction, the National Bureau of Statistics said.  
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The PBOC reiterated that it will keep the yuan exchange rate “basically stable" at a reasonable equilibrium level and maintain “basically stable" liquidity by using various monetary policy tools, according to a statement on its recent third-quarter policy meeting led by Governor Zhou Xiaochuan.
The move signaled that the central bank will continue to carry out a prudent and neutral monetary policy, with no intention of comprehensively loosening liquidity, according to Tao, adding that "the PBOC has no lack of liquidity and the only problem is where it goes."
The last cut to the benchmark RRR was in March of 2016.  
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