Priming The Pump : After Orders From Premier, Chinese Central Bank Cuts Banks’ Reserve Ratios by 1% To Revive Falling Growth

The People’s Bank of China (PBOC), China’s central bank, announced on Friday it was cutting the ratio of cash that banks must hold as reserves by 100 basis points (bps), or 1 percent, in a move that could pump 1.5 trillion yuan (US$210 billion) of additional liquidity into the banking system to help arrest a deepening economic downturn in the country, CNBC reported.

PBOC will reduce the required reserve ratio (RRR) by 0.5 of a percentage point on January 15 and follow it up with another equal reduction on January 25 so that banks have sufficient funds to lend, especially to private firms and small businesses. The reserve requirement ratios (RRRs) is currently pegged at 14.5 percent for large banks and 12.5 percent for smaller banks.

The policy move was announced hours after Chinese Premier Li Keqiang ordered the central bank to make universal cuts of the ratio as part of Beijing’s efforts to bolster economic growth. The central bank cut cut the RRR four times last year.

Beijing is hoping to revive growth by Increasing investment on infrastructures such as railways, motorways and airports.

Earlier this week, the PBOC changed its definition of a small business as any Chinese enterprise with a credit line of less than 10 million yuan from the previous standard of 5 million yuan . As per this report in South China Morning Post, this move will allow banks to lend more capital to enterprises now classed as small businesses, and therefore free up more reserves from the central bank, with estimates ranging from 400 billion yuan to as much as 700 billion yuan.

In December, the PBOC also injected 42.9 billion yuan of funds through pledged supplementary lending to the China Development Bank, the Export-Import Bank of China and the Agricultural Development Bank of China.

Another 92.9 billion yuan was lent to financial institutions through the standing lending facility to meet provisional liquidity demand.

A total of 473.5 billion yuan (about 69 billion U.S. dollars) was injected into the market via the medium-term lending facility (MLF) last month to maintain liquidity in the banking system at a reasonably sufficient level, according to the People's Bank of China (PBOC).