The People's Bank of China is turning a hawkish eye on shadow banking. Photo: AFP/Mark Ralston

China’s central bank said Friday it would cut the reserve requirements for banks, releasing some 550 billion yuan (US$79 billion) in liquidity as the country fights to control the economic fallout of the deadly coronavirus.

The People’s Bank of China (PBoC) said in a statement that it would cut the reserve requirement ratio (RRR) on March 16 by 50 to 100 basis points for banks that meet its assessment criteria, reducing the amount of cash they must hold.

There will be an additional 100 basis point reduction for eligible joint-stock commercial banks, to support the issuance of loans, said the PBOC.

The central bank’s moves come a day after China’s State Council released a statement saying Premier Li Keqiang called for targeted RRR cuts soon, to support bank lending to small- and medium-sized enterprises.

Julian Evans-Pritchard, senior China economist at Capital Economics, said the move was “yet another step in (the central bank’s) campaign to push down borrowing costs and shore up economic activity in response to the coronavirus outbreak.”

Nomura chief China economist Lu Ting said in a report on Thursday that “cutting RRR is the best way for cutting actual bank lending rates as RRR cuts could increase supply of funds.”

Since the virus outbreak, the PBOC has provided a total of 800 billion yuan to commercial banks via re-lending and re-discounting, he said.

“It also asked policy banks to increase lending to the economy by 350 billion yuan, though it’s still unclear whether these policy banks will get the 350 billion yuan funding directly from the PBoC,” he said.

Lu expects further liquidity injections in the coming months, through channels such as the medium-term lending facility.

AFP