China slashes reserve requirement to counter trade war pressures

The move releases around $108b in fresh liquidity into the system.

The People’s Bank of China cut the reserve requirement ratio for the third time this year in what has been widely interpreted as a move to boost economic activity in light of heightening trade tensions with the United States.

The central bank announced that it would slash the required amount banks must hold in reserves by 0.5%, releasing around $108b (RMB700b) into the financial system. The cut aims to ‘encourage five state-owned large-scale commercial banks and 12 joint-stock commercial banks to use directional RRR cuts and funds raised from the market to implement the “debt-to-equity swap” project,’ the PBOC said in a statement. 

The RRR cut is set to take effect on July 5, a day before the US and China are projected to begin collecting increased tariffs on goods.

“As such, these targeted RRR cuts remain consistent with the central bank’s current “prudent and neutral” policy stance as well as the government’s objectives including deleveraging, reforms and prevention of financial risks,” UOB analyst Suan Teck Kin said in a note.

Also read: Chinese banks' money supply received boost from RRR cut

The compression in shadow banking related activities including trust and entrusted loans as well as bankers’ acceptance bills is also a key factor in the distribution of the RRR cuts as smaller firms face the largest financing challenge amidst Beijing’s widespread deleveraging campaign, UOB added.