China: Q1's weak economic data prompts PBOC to sharply cut RRR in April
April 19, 2015
On 19 April, the People’s Bank of China (PBOC) decided to cut the reserve requirement ratio (RRR) for big banks for the second time this year. Although market participants widely anticipated this decision, they, the size of the cut caught them by surprise. The PBOC lowered the reserve requirement ratio for big lenders by 100 basis points to 18.5%, effective on 20 April. According to analysts, this move could inject around CNY 1.5 trillion (USD 240 billion) into the financial system. Moreover, the Bank decided to lower the requirement for village and rural banks by 100 basis points, while the Agricultural Development Bank of China received an additional 200-basis-point RRR cut. Furthermore, banks that meet the standards to support small- and medium-sized companies could receive an additional 50-basis-point cut to their RRR.
The PBOC decided to cut the RRR in an attempt to stimulate economic growth after Q1’s disappointing economic data and to counter rising disinflationary pressures. Moreover, this move is intended to revive monetary base growth in order to reach the official M2 growth target for this year of 12%. Money supply has come under pressure of late as FX purchases from the Central Bank—the traditional mechanism to bolster money supply in China—weakened mainly due to an acceleration of capital outflows.