China central bank cuts reserve requirement ratio as economy slows

China’s central bank cut the amount of cash most banks must hold in reserve, providing a liquidity boost to a slowing economy facing a worsening property slump and putting China on a clearly different policy trajectory than many other central banks.

The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for all banks except those that are already on the lowest level of 5%, according to a statement published Monday. The cut will be effective on December 15, according to the statement, which said the weighted average ratio for financial institutions will be 8.4% after the cut.

The cut is estimated to release 1.2 trillion yuan ($188 billion) of liquidity, the PBOC said in a Q&A accompanying the announcement. The move was signaled by Premier Li Keqiang last week when he said that authorities would cut the RRR at an appropriate time to help smaller companies, and is the second reduction this year. 

The decision comes after recent data showed the economy and industry stabilizing, although Beijing’s tightening curbs on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real-estate firms. 

Even with the deepening housing market slump, authorities had been restrained in adding new support policies, holding monetary policy steady and maintaining a measured pace of fiscal spending. However, the People’s Bank of China signaled an easing bias in the latest monetary policy report last month, while the State Council urged local governments to speed up spending. 

A cut in the reserve ratio doesn’t directly lower borrowing costs, but quickly frees up cheap funds for banks to lend. It could also help replace maturing central bank loans.