Central bank cuts RRR to support economy and small enterprise

China’s central bank announces RRR cut to support real economy amid trade row with the U.S.

The People's Bank of China (PBOC), the country's central bank, announced Sunday a 0.5 percentage point cut for banks' reserve requirement ratios (RRR), releasing a total of 700 billion yuan ($107.61 billion) for them to carry out a debt-for-equity swap and support the financing of small and medium-sized enterprises (SMEs).

Effective from July 5, the cut will release about 500 billion yuan for China's five major State-owned commercial banks and 12 joint-equity commercial banks, read a statement posted on the PBOC's official website.

According to the PBOC statement, the released capital will be applied to the debt-for-equity swap project.

In the meantime, the same ratio cut for other banks, including the Postal Savings Bank, municipal commercial banks and foreign banks, is expected to release 200 billion yuan, which will be mainly used in easing the difficulty and high price of financing for SMEs, the PBOC statement noted.

Given the slow pace of the debt-for-equity swap project since the start of this year, the targeted RRR cut will release long-term capital to help enhance the swap ability of the State-owned and joint-equity commercial banks, which are the major force of the project, according to the central bank.

Liu Xuezhi, a senior researcher with the Bank of Communications, said the cut, the third time since the start of this year, is as expected as the nation is still ramping up efforts in preventing systematic financial risks and ensuring the sound development of the real economy.

"There is also a chance that further RRR cuts will happen in the latter half of this year," Liu told the Global Times Sunday.

Liu opined that this cut is mainly due to internal factors to support the development of the domestic real economy, while the external environment, including China-U.S. trade frictions, which have resulted in risk-avoidance in the stock market and reduced some liquidity, still does not have enough of an effect to directly make the move happen.