China Central Bank Cuts Reserve Requirements to Release $56 Billion

Beijing is further loosening its monetary policy to help Coronavirus-hit businesses.

Belinda Zhou
    Apr 06, 2020 9:15 AM  PT
China Central Bank Cuts Reserve Requirements to Release $56 Billion
author: Belinda Zhou   

China's central bank announced a liquidity plan on Friday to cut reserves of small and mid-sized banks by 400 billion yuan ($56 billion) in order to  benefit coronavirus-hit businesses.

The People's Bank of China (PBOC) said it would cut the reserve requirement ratio for city commercial banks and rural lenders by 50 basis points on April 15 and May 15 separately, totaling 1%.

The stimulus move should free up 400 billion yuan ($56 billion) in China's banking system. After the cut, the deposit reserve ratio of more than 4,000 small and medium-sized deposit financial institutions will be reduced to 6%.

Those institutions included rural credit cooperatives, rural commercial banks, rural cooperative banks, village banks, financial companies, financial leasing companies and auto finance companies.

PBOC said that will help guide them to issue loans to small, medium and micro enterprises at a more favorable interest rate, and expand the credit supply of agriculture-related, foreign trade and industries that are more severely affected by the epidemic.

The central bank authority also announced it will cut excess reserve requirement for banks and financial institutions to 0.35% from 0.72%, effective April 7. 

This marks the first time the central bank lowered the excess reserves requirement since 2008, which is seen as a safety buffer for financial institutions in times of economic uncertainty. 

"Small banks can't afford money lending of large amounts, so they can only naturally serve small businesses," said Guoqiang Liu, the deputy governor of the central bank, at a press conference Friday morning.

China's economy was hit by the coronavirus, with widespread factory closures and nearly half a million Chinese companies closed in first quarter, according to Chinese commercial database Tianyancha.

The data company said that the country added more than 3.22 million companies in the first quarter, down 28.9% year-over-year. Most of the new companies are located in Guangdong, Jiangsu and Shandong provinces, of which more than 46% are wholesale and retail industry. 

Policymakers in China cut the reserve requirement ratio for the second time within a month, as the authority released nearly $80 billion to commercial banks.