Reserve requirement ratio cut in China — will it resuscitate the economy?

  • The RRR cut could strengthen banks’ resolve to provide loans to entities and keep the net interest margin (NIM) steady, as well as obtain lower-cost funds. In 2021, banks offered large credits at a low cost to entities to kick-start their operations. Meanwhile, sustained high cost of deposits pressured banks’ NIM. Small and medium-sized banks, unlike their large counterparts, are unable to raise funds and have less scope to improve their NIM. Moreover, although the PBOC has adjusted the deposit interest rate self-regulatory mechanism to reduce the cost of banks’ liabilities, it may have a limited effect in the short term. Nonetheless, the RRR cut could ease banks’ NIM and fund cost to a degree.
  • Enhanced liquidity from the RRR cut should prop up the economy and the troubled property market. Overall, China’s liquidity-consolidation measures are distinct from those adopted by other major economies, currently in a tightening mode.
  • Banks’ propensity to lend will still be a function of the increasingly risky environment. Moreover, loan demand remains anaemic amid lockdown measures and a property market slump. This means a rate cut will likely have a marginal effect on economic growth.

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Acuity Knowledge Partners

Acuity Knowledge Partners

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/