China cuts rate to aid banks

China’s central bank, the People’s Bank of China (PBOC), has cut the reserve requirement ratio (RRR) for almost all banks by 0.25 percentage points, effective from March 27. This surprise move by the PBOC follows the failure of some US banks and is an attempt to keep money flowing through the financial system and bolster the economy. In a statement, the PBOC said it would aim to “better serve the real economy and maintain reasonable and sufficient liquidity in the banking system”. This is the latest move in a series of measures aimed at stabilising China’s financial system.

Analysts had expected the PBOC to keep interest rates and the RRR “unchanged” through the first half of 2023, according to Goldman Sachs. The central bank has already injected billions of yuan into the banking system this year, mainly through a medium-term lending facility. The bank’s governor, Yi Gang, had previously hinted that monetary policy would be “largely stable” this year, but also acknowledged that RRR cuts remain “an effective monetary policy tool”.

The move by the PBOC came as a surprise to many and indicates the bank is taking proactive measures to keep China’s economy afloat amid global financial market turmoil. The recent collapse of two US banks and problems at Credit Suisse have raised concerns about the health of the global banking sector. Regulators on both sides of the Atlantic have provided emergency measures since Sunday to provide liquidity support to troubled lenders and restore confidence in the banking system. Last Thursday, a group of America’s largest banks stepped in to rescue First Republic Bank with a $30 billion lifeline.

The Chinese government has previously implemented measures to stabilise its financial system, including increasing oversight of financial institutions, regulating lending practices and tightening controls on shadow banking. The RRR cut is the latest measure aimed at ensuring the long-term liquidity of the banking system and supporting the economy.