At the start of the year, the People's Bank of China (PBOC) temporarily waived reserve requirements for newly incorporated interbank deposits at certain banking institutions, freeing up an estimated 1.5 trillion yuan ($241.7 billion) for lending.
Coming amid a slew of pump-priming measures aimed at bolstering credit growth within the real economy, some observers have misinterpreted the central bank's latest policy maneuver as equivalent to a reserve requirement ratio (RRR) cut of several dozen basis points.
In actuality, the PBOC's recent step differs greatly from an RRR reduction. Specifically, the central bank has only temporarily stopped requiring banks to set aside capital for selected interbank deposits. Loan-to-deposit ratios will rise again once this waiver is rescinded, leading to a return of tighter financing conditions. In contrast, an RRR cut would result in an indefinite increase in market liquidity.
The central bank will surely introduce additional monetary easing measures in the future. China is in the midst of a serious economic downturn and the PBC can be counted on to alleviate difficult credit conditions by promoting loan growth.
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