Experts: RRR reduction strategy to support business vibrancy

Experts predicted that China’s more aggressive than anticipated strategy to reduce the reserve requirement ratio will increase economic vitality and market confidence on Wednesday, as faith in the economy’s ability to recover is more crucial than ever. They said that in order to gradually lower financing costs for the actual sector, the country will have more room to cut lending rates and make better use of structural monetary policy tools. The remarks follow the announcement made by Pan Gongsheng, governor of the People’s Bank of China, the country’s central bank, that on February 5th, China will lower the RRR by 0.5 percentage point in order to inject around $140 billion worth of liquidity into the market.

 

Pan stated during a press conference in Beijing on Wednesday that the People’s Bank of China (PBOC) will also reduce the interest rates for rediscounting and relending for loans to small businesses and the agriculture sector to 1.75 percent starting on Thursday, from 2 percent. He went on to say that these actions will contribute to lowering the loan prime rate, or LPR, which is a benchmark lending rate set by the market and will benefit the actual economy. Zhou Maohua, a macroeconomic analyst at China Everbright Bank, stated, “We had anticipated an RRR cut to support domestic demand and solidify the economic recovery momentum, but the announced plan is slightly stronger than market expectations.” “The authorities’ will to bolster support for the real economy and sustain growth has been strongly and positively signaled by this.

 

Zhou said that the PBOC’s action will improve financial institutions’ ability to deliver credit, stop the growth of their overall liability costs, and create more room for the financial sector to better support the real economy by bringing long-term, stable, low-cost liquidity into the market. The RRR drop, according to Lou Feipeng, a researcher at Postal Savings Bank of China, will offer long-term, affordable lending that will support commercial banks’ efforts to stabilize their liability costs and net interest margins, therefore reducing the real economy’s financing costs.

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