China has decided to supply 1 trillion yuan (186 billion U.S. dollars) of liquidity to the market by cutting banks’ reserve ratio by 0.5 percentage point. The move is interpreted as an attempt to calm concerns over deflation by releasing money to the market ahead of the Lunar New Year holiday to revive consumer sentiment.
The People’s Bank of China said on Monday that it will cut the bank’s reserve requirement by 0.5 percentage point from March 5. As a result, China’s reserve requirement will be lowered from 10.5 percent to 10.0 percent. “We will lower the reserve requirement to provide the market with long-term liquidity of 1 trillion yuan in order to create a good currency and financial environment,” said Pangung-sheng, president of the People’s Bank of China.
The reserve ratio is the cash ratio that Chinese banks are obligated to accumulate in the People’s Bank of China among deposits, and lowering the reserve ratio increases the amount of funds to supply to the market, which has the effect of expanding liquidity. Bank president Pan stressed, “The current legal reserve ratio is 7.4% on average, which is higher than that of major economies.”
China was cautious about lowering the loan preferential interest rate (LPR), which corresponds to the benchmark interest rate, considering the difference in interest rates with the U.S. On Tuesday, China froze the one-year LPR for five consecutive months, making it more likely to cut the reserve rate.
It is a card that the market already expected to cut the reserve requirement, but one thing to pay attention to is the extent of the cut. The People’s Bank of Korea cut the reserve requirement four times in 2022 (April, December) and 2023 (March and September), with the adjustment being 0.25 percentage point. The sudden decision to cut the reserve requirement by 0.5 percentage point is interpreted as an indication of the authorities’ willingness to actively stimulate the economy.
The People’s Bank of Korea (BOK) added that it will lower the interest rate for small-scale re-loans and re-discounts supported by agriculture by 0.25 percentage points from Saturday. Through this, the bank plans to lower the interest rate from the current 2.0 percent to 1.75 percent to reduce the cost of comprehensive social loans stably.