China cuts reserve requirements to support economic recovery

• The People's Bank of China said on its website it would cut the reserve requirement ratio (RRR) for all banks by 50 basis points (bps), effective from July 15.
• Banks that are subject to an RRR of 5% will be exempted from the new cut.

China will cut the amount of cash that banks must hold as reserves, releasing around 1 trillion yuan ($154.19 billion) in long-term liquidity to underpin its post-Covid economic recovery that is starting to lose momentum.

The People's Bank of China said on its website it would cut the reserve requirement ratio (RRR) for all banks by 50 basis points (bps), effective from July 15.

The world's second-largest economy has largely rebounded to its pre-pandemic growth levels, driven by a surprisingly resilient export sector. But growth is losing steam and smaller firms are bearing the brunt of a recent surge in raw material prices.

Many analysts believe pent-up Covid demand has now peaked and that growth rates are starting to moderate in the second half of the year, weighed down by weakening exports, surging producer price inflation and Beijing's continued crackdown on the property market. 

The central bank said the weighted average RRR for Chinese financial institutions would fall to 8.9% after the cut.

Banks that are subject to an RRR of 5% will be exempted from the new cut.

The PBOC last cut the RRR in April last year, when the Chinese economy was still badly affected by the coronavirus crisis. As the economy staged its strong rebound, the PBOC shifted to a moderately tightening bias.

China's cabinet said on Wednesday that authorities would use timely cuts in RRR to help small firms cope with the negative impact from rising commodity prices, in an announcement that surprised the markets.

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