PBOC to cut reserve ratio, add liquidity

China's central bank announced on Friday it would reduce the cash financial institutions are required to keep in reserve and release about 1 trillion yuan ($154.24b) of liquidity effective on Thursday, an expected measure undertaken to better support the real economy and keep corporate financing costs at a low level.

The People's Bank of China said in a statement that it will cut the reserve requirement ratio by 50 basis points for eligible financial institutions, excluding those that have already held the ratio at a low level of 5 percent.

The move does not mean a shift is being made away from "prudent" monetary policy, the PBOC said, emphasizing that the RRR cut is a regular measure following China's monetary policy returning to a normal status in the first half of this year.

Some of the funds released will be used by financial institutions to pay back their lending through the so-called medium-term lending facility and some will be used to counter the liquidity shortage that may emerge late in July because of a peak in tax payment, the PBOC said.

The liquidity in China's banking system will remain generally stable, the PBOC said, citing the stable growth momentum of the country's economy. It also highlighted the need to maintain both the stability and effectiveness of the country's monetary policy, and to refrain from massive stimulus.

"We don't expect a broader shift toward monetary policy easing," said Louis Kuijs, head of Asia Economics of Oxford Economics, a British think tank. "An RRR cut should help maintain sufficient liquidity in the financial system and probably lead to somewhat lower interbank interest rates."

The RRR cut will save about 13 billion yuan in costs for financial institutions annually, helping reduce financing costs for everyone, according to the PBOC statement.

The move is intended to optimize financial institutions' capital structure and improve their services to support the real economy while maintaining adequate liquidity. It will also adjust the PBOC's financing structure and increase financial institutions' long-term stable capital resources to support small and micro enterprises.

The moderated inflation level – indicated by June's consumer price index of 1.1 percent, compared with 1.3 percent in May – has given more policy room for reducing the RRR. And the inflation is expected to be under control in the second half of the year, said Wen Bin, chief researcher at China Minsheng Bank.

The central bank also released major financial data on Friday. The total social financing, or the total financing resources injected into the real economy, increased by 17.74 trillion yuan in the first six months. Outstanding social financing increased by 11 percent year-on-year to 301.56 trillion yuan.

China's new yuan-denominated loans totaled 2.12 trillion yuan in June, up 308.6 billion yuan year-on-year. The broad measure of money supply, or M2, which covers cash in circulation and all deposits, increased by 8.6 percent on a yearly basis to 231.78 trillion yuan at the end of June, according to the PBOC.

Externally, the United States Federal Reserve, the US central bank, has already adjusted its monetary policy, and the risk for global stagflation may rise, according to some projections. Cheng Shi, chief economist and managing director of ICBC International, predicted that the PBOC might take the domestic situation as a priority for deciding its monetary policy and the country's liquidity level, despite some uncertainties globally.

"We do not think the PBOC will officially cut its policy rates in the second half of 2021," said Kuijs. "With CPI inflation expected to remain tamed, we also don't see a need for higher policy rates anytime soon," he added.