China’s central bank has decided to cut the country’s reserve requirement ratio (RRR) for commercial banks by 0.5%, opening up a potential RMB 700 billion ($100 billion) for lending in the face of a slowing second half of the year and a looming US-China trade war.
The cut will take effect on July 5th, according a statement released by the People’s Bank of China on Sunday. Large commercial banks are expected to have around RMB 500 billion extra at their disposal as a result, and smaller banks RMB 200 billion, according to the Financial Times.
The reserve cuts will be carefully “targeted”, the statement read. Large banks will be pushed to move the new funds into “debt-for-equity” swaps – where banks take an ownership share of highly leveraged firms in exchange for writing off some of their outstanding debt. This does not mean, however, that new capital should prop up “zombie” firms, the PBOC said.
Small banks should direct their funds to small and medium-sized enterprises which have traditionally been starved of credit as state-owned companies take the lion’s share.