Central bank to unleash USD108b in reserves cut

China’s central bank will cut the amount of cash some lenders must hold as reserves, unlocking about 700 billion yuan (USD108 billion) of liquidity, as it seeks to control leverage and support smaller companies.

The required reserve ratio for some banks will drop by 0.5 percentage point, effective July 5, the People’s Bank of China said on its website yesterday. The aim is to support small and micro enterprises, and to further promote the debt-to-equity swap program, according to the central bank. The cut will apply to major state-run commercial banks, joint-stock commercial lenders, postal banks, city commercial lenders, rural banks and foreign banks.

Such a reduction had been widely expected, especially after China’s cabinet said on Wednesday that it would use monetary policy tools, including cutting reserve ratios for some banks, to boost credit supply to smaller companies.

The PBOC designed the cut to do two different things. The 500 billion yuan unlocked for the nation’s five biggest state-run banks and 12 joint-stock commercial lenders will be channeled to debt-to-equity swaps, which can reduce companies’ debt burdens and help cleaning up banks’ balance sheets. The 200 billion yuan freed for smaller lenders such as the postal bank and city commercial lenders will be used to support funding for smaller businesses. Bloomberg