1. Does the reduction of required reserve ratio (RRR) indicate a shift from the sound monetary policy stance?
The stance of sound monetary policy is not shifted. In response to the COVID-19 pandemic in 2020, the PBC pursued normal monetary policies. With our gradual normalization of policy intensity from May, the monetary policies basically returned to pre-COVID normality in the first half of 2021. Since the RRR reduction is a conventional operation following the normalization of monetary policies, part of the funds released will be used by financial institutions to repay maturing medium-term lending facilities (MLFs), and part of the funds to bridge their liquidity gaps brought about by the peak season for taxation in mid-to-late July as well as to raise the proportion of long-term funds. The aggregate liquidity in the banking system will remain basically stable. At present, Chinese economy has been making steady progress with sound momentum. The PBC will continue to focus on the stability and effectiveness of monetary policies, pursue normal monetary policies, and refrain from adopting indiscriminate stimulus measures.
2. What is the purpose of the RRR reduction？
The RRR reduction aims to improve the funding structure of financial institutions and enhance their capabilities in financial services, thus better supporting the real economy. First, keeping adequate liquidity at a reasonable level, the PBC attempts to strengthen financial institutions’ ability to allocate funds, and create a favorable monetary and financial environment for high-quality development and supply-side structural reform. Second, the measure will adjust the financing structure of the central bank, effectively expand the sources of long-term stable funding of financial institutions in supporting the real economy, and guide these institutions to make good use of the funds released from the RRR reduction in boosting their support for micro and small businesses (MSBs). Third, the RRR reduction will lower the funding costs of financial institutions by approximately RMB13 billion annually, which, through financial institutions’ transmission, will further reduce comprehensive social financing costs .
3. How many funds will be released by the RRR reduction?
The PBC is scheduled to reduce RRR for financial institutions by 0.5 percentage points, which is to be implemented across the board, except for some county-level incorporated financial institutions that already carry a required reserve ratio of 5%. The measure will release about RMB1 trillion of long-term funds. The main reason why the PBC decides not to lower RRR for some financial institutions is that the 5 percent RRR is the lowest among all financial institutions at present, and for some financial institutions, keeping it at this low level is conducive to balancing their support for the real economy and their sound operations.
