In a bid to strengthen the economy amid trade conflicts with the United States and to restore investor confidence, The People’s Bank of China (PBOC) said that it will lower the amount of cash that some banks (which is known as the reserve requirement ratio) need to keep as reserve by 50 basis points (bps).
Currently, the reserve requirement ratio (RRR) for large banks and smaller banks is 16% and 14%, respectively. PBOC noted that the latest reduction in RRR will be enacted on Jul 5. The move is expected to free $108 billion in liquidity to quicken the clip of debt-for-equity swaps, boost lending to smaller firms and strengthen the economy.
Particularly, mid-sized and small banks will see a 200-billion increase in funding from the RRR cut which js targeted at turning around struggling or cash-strapped small businesses. This marks the third cut in the reserve requirement ratio this year. Though the latest move was predictable, the size of the cut ($108 billion) was $108 billion in liquidity.
Why the Cut?
Central bank had to take some simulative measure as China’s financial regulatory clampdown had started impeding business activity. Investors should note that the Caixin China General Manufacturing PMI was 51.1 in May 2018, the same as in April but lower than market expectations of 51.3.
Liquidity crunch has long been a problem for Chinese firms, resulting in increased credit defaults and painful operating conditions for small-scale manufacturers. The weighted average borrowing costs from non-financial firms have been on the rise, per Reuters.
Plus, a bull-blown trade war fear with the United States is another concern. With the export sector likely to be hit by a rise in U.S. import tariffs, China had to take the best preventive measure to shore up domestic demand.
Inside EscalatingTrade Tensions
Trade tensions between China and the United States, which have been lingering for more than three months, hit a fever pitch of late. Both the countries will enact a 25% tariff on each other’s $34 billion worth of goods starting Jul 6. The remaining $16 billion worth of goods will be under public review.
