The People’s Bank of China (PBOC) is cutting banks more slack for the sake of liquidity.
China central bank is loosening the rules on banks’ reserve requirements to avoid a cash-crunch in the world’s second-largest economy.
The rules, which go into effect Sept. 15, would allow banks to set aside fewer reserves when they are strapped for funds, but won’t allow for overdrafts, the PBOC said in a statement on its website.
Banks will be allowed to report a daily reserve requirement ratio (RRR) that is up to 100 basis points lower than the rate set by the PBOC, but their daily average RRR in the assessed period cannot fall under the required level. The PBOC did not state the period over which banks’ RRR will be assessed, Reuters reported.
Since the Chinese government allowed the yuan to float in August, there has been much volatility in the currency. To avoid sudden funding pressures, the new rules would allow for liquidity to be released into the markets when there is a shortfall.
The RRR is one of China’s main monetary policy tools to manage liquidity. With the economy slowing, China’s central bank has already this year dropped the RRR three times by two percentage points.
A bank’s RRR is determined by its size and type of loans it provides. The RRR for the largest banks is about 18%.
In June 2013, China suffered a bruising credit crunch when the PBOC, in an effort to stop risky lending, allowed short-term interest rates to surge as high as 30%.