Yesterday, the People’s Bank of China announced that the reserve requirement ratio (RRR) will be reduced by 50 basis points, effective on 24 Feb 2012. The RRR is currently standing at 21% for large banks, thus the reserve requirement ratio for large banks will stand at 20.5% after the cut. With about RMB80 trillion of total deposits, the reduction in RRR should theoretically make about RMB400 billion of deposits available for lending.
This is the second RRR cut since the tightening cycle ended last year. However, as pointed out late last year, with modest capital outflow and shrinking foreign exchange reserves (if the trend continues into the new year), monetary conditions are tightening by themselves even without the central bank attempting to withdraw liquidity. As a result, the latest cut in RRR will probably be a measure to offset the tightening bias of these monetary conditions. We will need to have more data points in the coming months to be really sure, but on the data we have, the cut in the RRR is to offset tighter liquidity conditions rather that to support growth outright.