Chinese banks may ramp up lending amidst $63.62b additional liquidity

Reserve requirement ratio for big commercial banks will be lowered from 17% to 16%.

Chinese banks can lend more credit to SMEs as the central bank cut the reserve requirement ratio (RRR) to unfreeze as much as $63.62b (CNY400b) in additional liquidity, according to OCBC Bank Research. 

In a surprise move, the People’s Bank of China announced to cut reserve requirement ratio (RRR) for most banks by 1% with the RRR for big commercial lenders lowered from 17% to 16%. The reform will kick into effect from April 25.

The cut actually unfreezes $206.86b (CNY1.3t). However, $143.16b (CNY900b) will be used to pay off existing Medium-term lending facility (MLF), leaving only $63.62b.

“The RRR cut will unfreeze more liquidity for those smaller banks with no direct access to the central bank liquidity facility, which may in turn better support the funding demand from SMEs,” OCBC added.

The almost universal RRR cut can also lower bank’s funding cost and improve profitability as the 1.62% opportunity cost for RRR is much lower than 3.3% one-year MLF cost. The reduction in required banking reserves similarly calls attention to Beijing’s looser monetary policy and away from a tight bias.

“Ever since China’s top economic policy body came out [with] the idea of structural de-leverage targeting at local government and SOE debt, market has formed expectation that the central bank is unlikely to tighten further.”