China announces details of targeted RRR cuts

China's central bank announced on Monday that it will cut the reserve requirement ratio (RRR) by 0.5 percentage points for banks engaged in proportionate lending to agricultural and small firms.

The cut will take effect from June 16, said a statement released by the People's Bank of China (PBoC), the central bank.

The statement provided the details following a cabinet decision late last month to launch narrow-based RRR cuts for banks engaged in lending to agriculture-related businesses and small and micro-sized companies, in efforts to enhance financial support to the real economy.

Banks eligible for the cut include those whose new loans to agriculture-related entities accounted for at least half of their total new lending in the last fiscal year; banks whose outstanding loans to agriculture-related entities accounted for at least 30 percent of their total outstanding loans in the last fiscal year will also be qualified for the cut, the statement said. The same rule applies to banks engaged in lending to small and micro-sized companies, according to the central bank.

"According to the standard, the targeted RRR cut will cover around two-thirds of city commercial banks, 80 percent of rural commercial banks above county level as well as 90 percent of rural cooperative banks above county level," said the statement.

Meanwhile, the central bank will cut the RRR for finance companies, financial leasing firms, and automobile finance enterprises by 0.5 percentage points. The cut is aimed to improve the capital use efficiency of these companies and boost consumption, the statement said.

The central bank noted that the cut will not apply to county-level rural commercial banks and rural cooperative banks, who had their RRR reduced on April 25.

Zhang Zhiwei, an economist with Nomura Securities, said in a research note that the cut is estimated to inject 95 billion yuan (15.45 billion U.S. dollars) of liquidity to the economy.

"Combining this measure and other liquidity injection actions through the re-lending facility and the RRR cut on April 25, we estimate the PBoC will inject 545 billion yuan of liquidity into the economy by the end of June," Zhang said.

Even though the announcement marks the second targeted RRR cut within two months, the central bank said this did not mean a change to the country's fundamental monetary policy.

"The PBoC will continue to implement a prudent monetary policy, maintain reasonable liquidity, as well as reasonable growth in both monetary credit and social financing," the central bank statement said.

It added that the directive RRR cut could boost credit structure, and such a monetary policy tool will also help with the nation's economic restructuring efforts.