China: PBOC cuts RRR to bolster liquidity
February 29, 2016
In the face of tighter domestic liquidity conditions due to ongoing capital outflows and strong demand for funds related to the Chinese New Year holidays, on 29 February, the People’s Bank of China (PBOC) announced a cut to the reserve requirement ratio (RRR) for the second time since October 2015. Effective 1 March, the PBOC reduced the RRR for large banks by 50 basis points to 17.00%, while the RRR for smaller institutions was lowered to 15.00%. With this move, monetary authorities expect to inject around CNY 700 billion (USD 108 billion) into the financial system while also signaling that monetary policy conditions will remain soft in the foreseeable future.
In the last few months, monetary authorities had preferred to use other tools to cope with the squeezing effect of capital outflows on domestic liquidity as additional easing could have exerted further depreciation pressures on the Chinese yuan. However, as liquidity injections have proven to be insufficient to improve financial conditions, coupled with the fact that exchange rate pressures have eased somewhat in recent weeks, authorities believed that it was the right timing to deliver a cut to the RRR.