China Loosens Cash Reserve Requirements On Banks As Economy Slows

China cut the amount of cash the country’s banks must hold in reserve to counter an economic slowdown.

The People’s Bank of China (PBOC) said that it is reducing the reserve requirement ratio for banks by 0.5 percentage points beginning on December 15, releasing 1.2 trillion yuan ($188 billion U.S.) of liquidity, according to a written statement.

The reduction was signaled by Premier Li Keqiang last week when he said that authorities would cut the reserve amount to help smaller companies and is the second reduction this year.

The decision comes after recent data showed China’s economy and industry stabilizing, although Beijing’s tightening curbs on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real-estate firms.

The cut is a "regular monetary policy action," the PBOC said, pre-empting expectations that the decision was the start of an easing cycle. "Prudent monetary policy direction has not changed," it said, adding that the bank "will continue with a normal monetary policy, maintaining the stability, consistency and sustainability of policy, and won’t flood the economy with stimulus."

However, with the U.S. Federal Reserve and other global central banks looking to tighten policy, the move to add stimulus marks a divergence between China and much of the rest of the world.

The reserve cut is being applied to all banks except those that are already on the lowest level of 5%, which are mostly small rural banks. The weighted average ratio for financial institutions will be 8.4% after the cut, down from 8.9% previously, the PBOC said.

Some of the money released will be used by banks to repay maturing loans from the PBOC’s medium-term lending facility, and some of it will be used to replenish financial institutions’ long-term capital, the central bank said. There are almost one trillion-yuan worth of the one year loans maturing on December 15, the day the cut takes effect.