China Banking Regulator to cut cash reserve requirement ratios for banks

Out-Law News | 10 Jun 2014 | 10:50 am | 2 min. read

The China Banking Regulatory Commission (CBRC) is planning to cut the proportion of cash which banks must keep with the People's Bank of China (PBoC), Reuters news agency has reported.

The regulator has not made it clear when it will make reductions in banks' reserve requirement ratios (RRRs), however the move represents the third time in three months that China has signalled a cut in RRRs, Reuters said.

The PBoC has also indicated that it will allow China's main money market rate to fall again this week, the news agency said.

Commentators have said the measures are expected to free more cash in the economy for lending and ensure a good level of credit supply, the news agency said.

China last reduced the RRR for all banks in May 2012, according to Reuters, with a cut of 50 basis points which lowered to 20% the ratio of cash reserves China's largest banks must keep.

In April this year, the PBOC reduced the RRR by between 50 and 200 basis points for some rural banks. The authorities indicated a week ago that it would implement another cut in RRRs, but it is not yet clear whether that has taken place, said Reuters.

The CBRC has also said that it will tighten supervision of the shadow banking sector, which is the system of non-deposit taking financial intermediaries which can include investment banks, hedge funds and other securities operators. The move is an attempt to clamp down on lending that occurs outside bank balance sheets and is regarded as relatively risky, Reuters said.

China has expressed concerns about a slow down in its economic growth in recent months, and has introduced a number of measures designed to support its economy.

Official statistics found that China's gross domestic product (GDP) grew 7.4% in the first quarter of 2014, compared to the same period last year. This was slower than the government's target of 7.5% growth for this year. Chinese officials also recently warned that China could miss its trade growth target for a third consecutive year in 2014 due to rising labour costs and weakening global demand. Zhang Ji, director general of the foreign trade department at China's ministry of commerce said that a period of high growth for China has ended as increased costs reduce its competitiveness and as Europe and the US try to boost their manufacturing and export sectors, according to Reuters.

Ren Zeping, the deputy director of the macroeconomic research department at the Development Research Centre of the State Council (DRCSC) said recently that China's economy could slow to around 5% by 2017, as China's economy shifts gear from high speed growth to medium-speed expansion, said Reuters.

Officials are concerned about a number of factors in the Chinese economy, said Reuters, including China’s debt load, relatively weak global demand, and overcapacity in some sectors, including the steel industry. Beijing is also concerned about a slow down in the Chinese real estate market, which has been the key driver of the economy over the past decade said the news agency. Average prices for new homes fell in May from the previous month, representing the first contraction in nearly two years, according to the China Real Estate Index System, said Reuters.

Recent stimulus measures introduced by the government include ordering commercial banks to offer more mortgage loans to home buyers and extending tax breaks to all companies who employ people who have been unemployed for more than one year, the state press agency Xinhua reported.