Central bank lowers reserve ratio

China's central bank announced that it was lowering the amount of cash that all financial institutions need to reserve starting on Monday.

The move will release liquidity of at least 1.2 trillion yuan ($197 billion) to support economic growth.

It is the second reserve requirement ratio cut in three months. The 1 percentage point drop was the largest since November 2008.

An extra 1 percentage point cut in the ratio will be given to commercial banks for agricultural services and an additional reduction of 2 percentage points to the Agricultural Development Bank of China, the People's Bank of China said.

It will further lower the ratio by 0.5 percentage points for eligible banks that lend a certain amount of money to agricultural borrowers or to small and micro businesses.

Lu Zhengwei, chief economist at Industrial Bank, commented that the cut was "inevitable" but "a little bit late", as the funds outstanding for foreign exchange have continued to drop since April last year, which means market liquidity has actually tightened.

Cutting the reserve requirement ratio is more effective in reducing loan costs for industrial companies than decreasing the benchmark interest rate, Lu said.

Commercial banks' lending costs for new loans are higher than industrial profit in recent months, according to economists, especially in March when the growth in industrial output declined to a post-crisis low of 5.6 percent.

That was down from 6.8 percent in the first two months of the year and from 7.9 percent in December.

chenjia1@chinadaily.com.cn