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China will cut reserve requirements for banks

China will for the first time this year reduce the amount of cash banks must hold as reserves to cushion a sharp slowdown in economic growth.

The People’s Bank of China (PBOC)  will cut the reserve requirement ratio (RRR) for all banks by 25 basis points, effective April 25.

The risks posed by the war in Ukraine and the shutdown over Covid-19 are causing complications in China that are quickly spilling over into global supply chains.

The PBOC said the RRR reduction will increase long-term funding for banks, allowing them to increase support to industries and firms affected by the COVID-19 outbreak and reduce bank’s costs.

Graph next to a Chinese banknote

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Urban commercial banks that do not operate across provinces and rural commercial banks that have an RRR of more than 5% are eligible for an additional 25 basis points reduction.

The weighted average RRR for financial institutions will be reduced to 8.1% after the cut. At the same time, it has started cutting interest rates, while local governments have accelerated infrastructure spending and the finance ministry has promised further tax cuts.

China primarily wants to grow

Chinese imports unexpectedly fell in March as restrictions made it harder for freight to arrive and weakened domestic demand. Exports and factory activity also weakened. This is primarily due to the fight against the Covid-19 pandemic.

China wants to grow this year, specifically by 5.5%. Such economic growth needs the support of the banks so that more investment and project financing can take place. This is what the RRR cut, along with other government and central bank actions, should help.

Bruno is an Investment enthusiast with several years of experience in the industry. He enjoys following the latest news and technology trends...

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