China to cut reserve ratio for most commercial banks

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China’s central bank announced on Tuesday that it will cut the amount of cash that some banks must hold as reserves from April 25, in a bid to optimize liquidity structure and free up funding for smaller firms.

The People’s Bank of China (PBOC) said on its website that it would cut the reserve requirement ratio (RRR) – currently at 15 percent or 17 percent – by 1 percentage point for large commercial banks, joint-stock commercial banks, city commercial banks, non-county-level rural commercial banks and foreign banks.

The banks mentioned above will use a large proportion of the funds unleashed by the RRR reduction, namely 900 billion out of the total 1.3 trillion yuan, to pay back the medium-term lending facilities (MLF), a monetary tool invented by the central bank in 2014 to offer short-term loans to commercial banks.

Therefore, a net release of 400 billion yuan will go to the banks, mostly to city commercial banks and non-county-level rural commercial banks, according to the PBOC.

Currently, the interest rate of one-year MLF is 3.3 percent. With the MLF paid back, commercial banks will be relieved the burden of paying the interest to the central bank, subsequently lowering financing cost for the enterprises.

The PBOC requires the banks to mainly use the newly released funds to provide loans to small and micro companies and lower their funding cost, which it said would be included as a requirement in its macro-prudential assessment for banks.

The PBOC also said it will continue to maintain the current prudent and neutral monetary policies, and relatively high reserve requirement ratios for banks to fend off financial risks.

It added it will guide reasonable and steady growth in credit and social financing.