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China's Central Bank Cut Both The Requirement Reserve Ratio

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China's central bank cut both the requirement reserve ratio (RRR), the amount of reserves banks required to hold, and benchmark interest rates on Saturday.

The credit-easing move, to be effective on Sunday, aims to "support the real economy and promote restructuring," said the People's Bank of China (PBOC) in an announcement.

The central bank cut the RRR for commercial banks serving rural areas, agriculture and small businesses by 50 basis points (bps). The RRR for finance companies, or non-bank financial institutions, will be lowered by 300 bps, the PBOC announced.

Benchmark interest rates have also been cut. Interest rates for one-year lending and deposits are cut by 25 bps to 4.85 percent and 2 percent respectively. Lending of other terms and kinds will also be lowered by the same margin, the announcement said.

It is the third RRR reduction in nearly five months, and the fourth round of interest cuts in nearly seven months.

Against the backdrop of "new normal" of slower but more sustainable growth, China still faces a tough task of stabilizing growth and needs to continue to use the monetary policy tools flexibly in order to lower borrowing costs and boost economy through restructuring, the PBOC said while explaining its decisions to the press.

"China will maintain the prudent monetary policy and further push forward the reforms of interest rate liberalization and the RMB exchange rate formation mechanism," it said.

The purpose of the RRR reduction is to boost financial institutes' abilities to support farmers, rural and agricultural development as well as small and micro businesses, the PBOC said.

"It also aims to improve the key areas and weak links in the national economy and is conducive for the financial institutes to support mass entrepreneurship and innovation," according to the PBOC.

Mass entrepreneurship and innovation, alongside increased supplies of public goods and services are considered as the two engines to drive growth amid "new normal", according to the annual government work report.

"Liquidity for Chinese banks is affluent given that their excessive reserves, reserves of cash more than the required amounts, are roughly at 3 trillion yuan(490 billion U.S. dollars)," said Yao Yudong, director for the PBOC's Finance Research Institute.

The rare easing step of cutting the RRR and the benchmark interest rates will make the monetary policy adjustment more targeted and effective to support the real economy, according to Yao.

China's economic growth fell in the first quarter to 7 percent, its lowest level in six years.

Source: Xinhua
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