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China's central bank says it's cutting reserve requirements for small and medium banks

Key Points
  • China's central bank said on Monday it will lower the reserve requirement ratio for small and medium-sized banks effective on May 15.
  • This marks the latest policy support measure by Beijing to support companies struggling amid an economic slowdown.
Signage for the People's Bank of China is displayed on its headquarters building in Beijing, China, on Monday, Feb. 26, 2018.
Giulia Marchi | Bloomberg | Getty Images

China's central bank said on Monday it will cut the reserve requirement ratios (RRRs) for small and medium-sized banks effective from May 15, in a targeted policy measure to help support companies struggling amid an economic slowdown.

The People's Bank of China (PBOC) said in a statement that the reduction will release about 280 billion yuan ($41.23 billion) in long-term funding, which will be used for loans to small and private companies.

The central bank said it will cut the RRR for about 1,000 rural commercial banks operating in counties to 8 percent, equal to the RRR for smaller rural credit cooperatives.

The move will help lower funding costs for small and micro firms, the PBOC said.

Small and medium-sized banks currently have RRRs ranging from 10 percent to 11.5 percent.

The cut, while widely expected, came after U.S. President Donald Trump sharply escalated trade tensions between the world's two largest economies with comments on Sunday that talks toward a trade deal with China were proceeding "too slowly", and that he would raise tariffs on $200 billion of goods to 25 percent on Friday from 10 percent.

"I think it is a move to calm the market, to offset the impact from the trade talks, telling you that 'I can give some stimulus during the most difficult times, but I will not give too much'," said Zhou Hao, analyst at Commerzbank in Singapore, noting the PBOC's targeted cut showed Beijing's resolve to keep its debt level in check.

Trump's tweets upended the previously calm market mood that had benefited from signs of robust growth in China and the United States, and from comments from Trump and other senior U.S. officials that trade talks were going well.

The State Council, or cabinet, said on April 17 that a policy framework would be set up to implement relatively low RRRs for small- and medium-sized banks.

The PBOC is likely to cut RRRs for small banks to encourage more lending to small and private firms — which are vital for economic growth and job creation - policy insiders told Reuters previously, who penciled in at least one such "targeted" RRR cut this year.

Commerzbank's Zhou said the PBOC announcement showed Beijing has made preparations in the event that the trade talks fail.

"I think the market had underestimated China's determination to deleverage, while overestimating China's willingness to reach a trade agreement," he said.

China's Vice Premier Liu He, who was scheduled to go to Washington this week, is "very unlikely" to follow through after Trump's "threat" to hike tariffs on $200 billion worth of Chinese goods, editor-in-chief of China's Global Times newspaper said on Monday.