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China economy

Chinese central bank official insists new cash reserves rule won’t affect resolve to cut financial risk

People’s Bank of China recent cut minimum ratios for lenders that cater for small businesses and agricultural sector

PUBLISHED : Monday, 09 October, 2017, 9:40am
UPDATED : Monday, 09 October, 2017, 9:43am

The plan by China’s central bank to cut the amount of cash reserves that some banks must hold will not alter policymakers’ resolve to lower financial risk, state-run China Daily reported an official as saying on Monday.

The People’s Bank of China said at the end of September that it would cut the reserve requirement ratio (RRR) for some banks that meet its requirements for lending to small business and the agricultural sector.

The senior central bank official, who was not identified, told the newspaper that the planned cut would also not impede policymakers’ determination to lower bank leverage ratios.

The paper said RRR cuts had been made before to supplement liquidity during capital outflow surges and falls in foreign exchange reserves, but that was not the case this time as inflows into China were strong.

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“Some financial institutions, which have appealed for an easing of monetary policy, do feel liquidity stress during the [anti-leverage] campaign to tame interbank borrowing to prevent systemic risks,” he added.

China’s move comes after the US Federal Reserve said it would wind down quantitative easing this month, which means the People’s Bank is more likely to use “monetary policy fine-tuning in the future compared with the situation in March and last year, supported by a further stabilised macroeconomic base,” the official said.

While China expects the US dollar index to strengthen following an interest rate rise, the overall impact on China’s foreign exchange policy would be limited, the official added.