The latest move by central bank does not amount to a formal cut in the reserve requirement ratio

Beijing, September 12

China on Friday loosened the means for calculating the reserve requirement ratios of banks, the state news agency Xinhua reported, effectively increasing the amount of money banks can lend.

The move does not amount to a formal cut in the reserve requirement ratio (RRR), but will allow banks to undershoot it by as much as one per cent on a daily basis as long as they meet the requirement on average.

Loosening the RRR is also a stimulatory measure as it increases the amount of money banks can lend, which can boost economic activity.

Decades of rapid growth in China have been spurred by huge exports and massive state spending, but Beijing says it is keen to retool to boost domestic consumption if its economy is to continue to grow sustainably.

Fears over the Communist authorities’ ability to manage this transition have sent jitters through financial markets around the world, where China has until now been a bright spot on an otherwise largely gloomy horizon.

An announcement earlier this week by the country’s finance ministry that it would accelerate major construction projects, encourage private capital to invest in key areas and cut taxes for small and medium-sized enterprises to support growth also appeared to be easing concerns, some analysts said.

In another positive move, media reports said that China is preparing to unveil broad reforms for state-owned companies which will see some firms shut and others introduce more diversified ownership.

Friday’s report stated that China’s central bank has changed ‘its reserve requirement rules, replacing the current daily assessment of bank reserves with an averaged approach’, Xinhua reported.

“From September 15, the reserves of commercial banks will be regulated on an average basis during an assessed period, but there will be a minimum daily amount of reserves, the central bank said in an online statement.”

It did not specify over what period the average will be calculated.By the end of each business day, the reserve ratio of commercial banks will be allowed to be less than one per cent lower than the compulsory ratio set by the central bank.

The report quoted People’s Bank of China as saying that the reform will ‘help commercial banks ensure both efficiency in their capital use and a safe liquidity level’.