PBOC Cuts Reserve Ratio By 50 Basis Points

Starting on February 5, the reserve requirement ratio (RRR) for financial institutions will be lowered by 0.5 percentage points by the Chinese central bank, resulting in the provision of long-term liquidity worth 1 trillion yuan ($141 billion). In order to promote confidence and economic recovery, this measure works to lower the loan prime rate (LPR), a benchmark lending rate set by the market. By taking this action, the supply of credit will increase and the economy’s growth will be strengthened.

The news of the first RRR drop this year, following two cuts last year, offered a major lift to the financial markets. The Shanghai Composite Index soared 3.03 percent on news of the reduction, while the smaller Shenzhen Component Index climbed 3.3%. The RRR was last lowered by 25 basis points by the People’s Bank of China (PBOC) in September 2023. This announcement of a 50 basis point reduction was twice as large as the typical cut. The banking system received almost 1 trillion yuan in long-term liquidity as a result of last year’s decreases.

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