China's central bank said on Sunday it would cut the amount of cash that some banks must hold as reserves by 50 basis points (bps), releasing $108 billion in liquidity, to accelerate the pace of debt-for-equity swaps and spur lending to smaller firms.
The reserve reduction, the third by the central bank this year, had been widely anticipated by investors amid concerns over market liquidity and a potential economic drag from a trade dispute with the United States.
But the 700 billion yuan ($107.65 billion) in liquidity that the central bank said will result from the reduction in reserves was bigger than expected.
Expectations of a cut had risen after the State Council, or cabinet, said on Wednesday monetary policy tools including targeted cuts in banks' reserve requirement ratios will be deployed to strengthen credit flows to small firms and keep economic growth in a reasonable range.
Economists are not ruling out further reserve requirement reductions for the rest of the year as borrowing costs rise due to Beijing's clamp-down on leverage in the financial system, a campaign now in its third year, while uncertainty over Sino-U.S. trade ties persists.
The People's Bank of China (PBOC) said on Sunday that the latest targeted cut in some banks' reserve requirement ratios (RRRs) — currently 16 percent for large banks and 14 percent for smaller banks — will take effect on July 5.
The PBOC said the cut will release about 500 billion yuan ($77 billion) for the country's five large state banks and 12 national joint-stock commercial banks. Lenders are encouraged to use the money to conduct debt-for-equity swaps.
China's policymakers have been pushing for debt-for-equity swaps since late 2016 to ease pressure on firms struggling with their debts.
The country's top banks, controlled by the government, have rushed to sign deals with state-owned enterprises to ease their debt burden and give them time to turn around their business and improve their creditworthiness.
The latest RRR cuts will also release about 200 billion yuan in funding for mid-sized and small banks to increase lending to credit-strapped small businesses, the PBOC said.
The combined 700 billion yuan liquidity injection exceeded market expectations of 400 billion yuan. In the PBOC's last targeted RRR cut in April, 400 billion yuan of net liquidity was released.
"The intensity of the move exceeded market expectations," said Wang Jun, Beijing-based chief economist at Zhongyuan Bank.
"This move will help support the real economy and stabilise financial markets. We've seen rising debt defaults and funding strains on small firms, as well as a sharp adjustment in the capital market."
But the latest reserve cut signals a "policy fine-tuning," not a policy reversal, Wang said.
The central bank said on Sunday it will keep monetary policy prudent and neutral. Sunday's announcement followed the worst weekly loss in the Chinese stock market since early February as fears of a full-blown trade war with the United States weighed.
The Chinese yuan on Friday also fell to its lowest versus the dollar in more than five months, though it has remained firm against a basket of trading partners' currencies, and a sharp depreciation is not in the cards.