China May Inject Funds as Early as This Week... Bank Reserve Requirement Ratio Expected to Be Cut by 0.5~1%p

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[Asia Economy Beijing=Special Correspondent Park Sun-mi] The People's Bank of China is highly likely to supply liquidity to the market as early as this week to support small and medium-sized enterprises (SMEs) hit by the COVID-19 impact.

On the 12th, the Communist Party's official newspaper, People's Daily, reported on its front page about the State Council executive meeting chaired by Premier Li Keqiang on the 10th, stating that policies to expand support for SMEs by commercial banks and reduce financing costs should be promoted. It also reported that a special discounted loan of 800 billion yuan has already been allocated to help companies related to COVID-19 prevention and control resume operations quickly.

Since the State Council executive meeting mentioned the government's financial support policies to normalize corporate activities, experts are focusing on the possibility that the People's Bank of China will soon use the bank reserve requirement ratio (RRR) cut, which has the effect of supplying additional liquidity. Expectations for economic stimulus measures from the Chinese government after the COVID-19 outbreak have increased, and the fact that the call to reduce corporate financing costs was directly mentioned at the State Council executive meeting is interpreted as a signal that the People's Bank of China’s announcement on the bank RRR cut is imminent.

Li Daxiao, chief economist at China Yingda Securities, said, "The People's Bank of China will take follow-up measures immediately after the State Council executive meeting," adding, "An announcement on the RRR cut will come within the next few days, and it could be as early as this week."

Economic experts expect the People's Bank of China to cut the bank RRR by 50 basis points to 100 basis points (100bp = 1 percentage point). In this case, liquidity of 300 billion to 700 billion yuan will be released into the market. The liquidity is expected to mainly benefit SMEs that suffered economic losses due to the COVID-19 outbreak.

Currently, yuan loans in the Chinese banking sector are significantly contracted. According to statistics released by the People's Bank of China the day before, the amount of new yuan loans by banks in February this year was 905.7 billion yuan, shrinking to about one-quarter of January's 3.34 trillion yuan.

Liu Xueji, an economist at Bank of Communications China, explained, "SMEs will be the main beneficiaries of the bank RRR cut," adding, "It will help companies whose cash flow has worsened due to the COVID-19 outbreak."

The expectation that the People's Bank of China’s RRR cut is imminent aligns with the global atmosphere where countries are introducing various measures, including monetary easing, to minimize the economic shock caused by the spread of COVID-19.

Meanwhile, the last time the People's Bank of China cut the bank RRR was on January 6 this year, releasing 800 billion yuan of liquidity into the market with a 0.5 percentage point cut. Since 2018, the People's Bank of China has actively used the bank RRR cut as a liquidity supply method and has implemented a total of eight RRR cuts so far.

This content was produced with the assistance of AI translation services.