The People's Bank of China announced on September 29 a 50 to 150 basis-point reduction in the reserve requirement ratio (RRR) for commercial banks from January 1 next year. The PBoC said the requirement cuts were based on how well banks meet needed requirements. Nearly all commercial banks are eligible for a 50 basis-point cut, but only a small group of banks are entitled to larger reductions. The PBoC hopes the reduction of RRR will encourage lending to small firms and farming operations, but it is difficult to see how the measure works without other incentives or actions.
The RRR defines the portion of a bank's customer deposits it must keep at the central bank. The money cannot be lent ahead and the PBoC only pays marginal interest on it. After the cut, the average reserve ratio in China will be about 16 %, which is still high by international standards.
It is exceptional for the PBoC to announce a reserve requirement ratio adjustment three months in advance. The typical heads-up has been about a week. Consequently, some market participants speculate that the move has more to do with the upcoming changes in macro-prudential assessment of commercial banks at the start of next year than a change in lending policy or monetary easing. The PBoC itself noted that the lowering of the RRR does not signal a change in monetary policy.