People’s Bank Of China Injects $56B Of Liquidity To Boost Lending

The People’s Bank of China (PBOC) trimmed the amount of cash some banks must put aside as reserves as a way to encourage lending, as the world’s second-largest economy is set for the slowest growth since the 1970s.

The PBOC plan is to trim the mandatory reserve ratio for rural and small commercial banks by one percentage point and free up credit, Bloomberg News reported on Friday (April 3).

By trimming the reserve ratio, the bank will free up $56 billion of liquidity, with half the cut taking effect on April 15 and the rest on May 15, the report said.

This has been the PBOC’s way to fix the lack of credit as businesses struggle to stay afloat during the COVID-19 crisis. The approach is a modest one, Bloomberg reported, given that other countries have pledged to purchase securities and do direct lending.

When the results of the first quarter are released shortly, activity in China is expected to reflect a fledgling economy amid the pandemic that forced the government to shutter the nation to protect itself from the deadly virus.

“The cut is aiming to support small banks whose asset quality has been affected by the coronavirus,” Xing Zhaopeng, a market economist at Australia and New Zealand Banking Group in Shanghai, told Bloomberg, adding that he expected the one-year loan prime rate to drop by 20 basis points in April after the move. “The second quarter will see more liquidity injection and regulatory adjustment to encourage banks to give more loans to small and medium-sized firms.”

According to the report, 6 percent of the more than 4,000 small and mid-sized businesses would be allowed to keep their reserves low after the ratio is trimmed. That would provide each lender with an extra $14 million of long-term liquidity.

Lowering the rate for these banks would support more focus on lending to smaller companies by increasing the liquidity supply and reducing financing costs, PBOC Deputy Governor Liu Guoqiang told Bloomberg.