People’s Bank of China signals reserve ratio cut to boost rural finance

Bloomberg reports that China’s central bank (PBOC) signaled it may reduce the reserve requirement ratio for banks to spur rural finance, a targeted move that would help cushion the economy as it slows.

PBOC Governor Yi Gang earlier this week pledged to boost credit support to the economy and improve efforts to bring down real lending rates for businesses. Analysts said there could be an increase to credit supply soon and another reduction in the RRR following July’s surprise cut.

Zhou Hao, senior emerging market economist at Commerzbank AG in Singapore, said the PBOC’s comments have fueled speculation of a RRR cut as early as Friday. Lu Ting, chief China economist at Nomura Holdings Inc., sees more than 70% chance of a RRR cut in the next two months. 

The PBOC has in the past cut the required reserve ratio for rural banks to encourage lending to the agricultural industry and small businesses. The last time it did so was in April 2020, when it lowered the RRR by 1 percentage point for rural financial institutions and regional commercial banks, unleashing 400 billion yuan ($61.7 billion) in liquidity.

Lu said any cut in the RRR will likely be targeted that injects less than 500 billion yuan of liquidity, given the effective RRR for small banks is already quite low at 5.5%.