The People’s Bank of China (PBOC) has injected liquidity into the banking system in response to rising pressures in the domestic banking industry and growing risks abroad. The move was considered “timely” by a state-owned Chinese newspaper. On Friday, the central bank reduced the amount of cash banks must hold as reserves for the first time this year, a decision that came earlier than expected by financial markets.
The reserve ratio cut is aimed at supporting a nascent recovery in the world’s second-biggest economy. The PBOC’s decision will release around RMB 1tn ($154bn) of long-term liquidity into the banking system. The central bank’s actions come amid concerns over rising defaults in China’s property market, which could pose systemic risks to the economy.
The reserve requirement ratio (RRR) cut by the PBOC will lower the amount of cash that commercial banks must hold as reserves, freeing up more funds for lending. The move is expected to help banks meet the rising demand for credit from the corporate sector.
China’s economy has been recovering since last year, but growth has slowed in recent months due to supply chain disruptions and a resurgence in COVID-19 cases. The RRR cut is aimed at supporting economic growth by providing more liquidity to the banking system, which should help boost lending to businesses and households.
The PBOC’s decision to inject liquidity into the banking system is in line with other central banks’ moves to provide support to their respective economies amid the ongoing COVID-19 pandemic. The European Central Bank, for example, has recently increased its asset purchase program to provide more support to the eurozone economy.
In conclusion, the PBOC’s decision to cut the reserve requirement ratio and inject liquidity into the banking system is aimed at supporting China’s economic recovery and addressing growing risks in the domestic banking industry. The move is expected to help boost lending to businesses and households, and support economic growth in the coming months.
