China’s central bank took targeted monetary policy measures on May 6 to calm stock market and fill the liquidity gap for small and medium-sized banks, building a cushion to stabilize economic growth amid trade tensions.
Unlike conventional measures, this new type of targeted reserve requirement ratio cut will release 280 billion yuan ($41.39 billion) kept by only 1,000 banks in the central bank, the monetary authority said.
That amount of cash, to be injected into the financial system from May 15, was smaller than any of the former five injections since January 2018. And all the freed funds will be used for loans to private, micro and small companies, the People’s Bank of China, the central bank, said in a statement.
After the cut, the RRR for rural commercial banks that operate in counties will decline to 8 percent, down from the current 10 percent to 11.5 percent, and that is the lowest RRR level among all banks.
A three-bracket RRR system will be established, echoing the call of the State Council to build a new policy framework pegging a lower RRR for small and medium-sized banks. The upper RRR level, at 13.5 percent, is for large banks, and the middle level of 11.5 percent is for small and medium-sized banks.
The RRR cut was expected since April, as there was growing concern in the market over the liquidity shortage and rising interbank borrowing costs. But the monetary authority took no action until the stock market saw a turbulent opening on May 6.
Uncertainties in trade negotiations between China and the United States have weakened investors’ confidence, analysts said.
The Shanghai Composite Index tumbled 5.58 percent at close on May 6. The Shenzhen SME Board Index, reflecting the performance of listed small and medium-sized enterprises, plunged 7.27 percent.
The yuan’s central parity rate, or the daily trading reference, was set at 6.7334 per dollar by the PBOC, the central bank, on Monday, the weakest level since Feb 20.
“The timing of the targeted RRR cut suggests the central bank did take into consideration the stock markets in making this move,” said Lu Ting, chief China economist of Nomura Securities. He expected the market interest rates and bond yields could moderate over the next couple of weeks.
The decision on May 6 to cut the RRR was likely to offset the potential negative impact of China-US trade talks and to narrow the liquidity gap for smaller banks when they were required to issue more loans to small and private companies, according to Lu.
Yan Se, a professor in the economics department at the Guanghua School of Management, Peking University, said the move will strengthen credit support for private and small companies, which is important to stabilize economic growth and employment amid external headwinds.
Instead of lowering the RRR for all banks, the cut on May 6 is a focused tool that can improve monetary policy efficiency and avoid a “flood-like” stimulus, said analysts.
That means further RRR cuts in the second quarter are less likely, said Yan. But if the second quarter’s economic indexes are weaker than policymakers’ expectations, the PBOC may make another similar targeted RRR cut afterward, he said.
On May 6, the PBOC also bought 20 billion yuan worth of seven-day bonds, at an interest rate of 2.55 percent. Through that operation, the PBOC can purchase securities from commercial banks with an agreement to sell them back in the future, to maintain ample liquidity in the banking system.