The RRR cut will free up CNY500bn liquidity. Credit: Eric Prouzet on Unsplash.

Chinese central bank has cut the amount of cash that banks must hold in reserves to deal with the economic downturn due to the surge in Covid cases and the weak property market. 

In a statement, the People’s Bank of China (POBC) said it has cut the required reserve ratio (RRR) for financial institutions by 25 basis points. 

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This does not apply to banks that have already implemented an RRR of 5%, the central bank said. 

The RRR cut will be implemented on 5 December 2022 and is expected to free up to around CNY500bn ($70bn) liquidity. 

The decision comes as China battles the disruptions caused by new Covid-19 cases, with daily infections rising to over 31,000, reported SCMP. 

Explaining the rationale behind the move, the POBC said: “First, it serves to keep liquidity adequate at a reasonable level, maintain a reasonable growth of money and credit aggregates, ensure implementation of the policy package for stabilizing the economy, increase financial support for the real economy, and bolster reasonable economic growth and quality of growth.

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“Second, it aims to improve the funding structure of financial institutions, expand their sources of long-term stable funding, enhance their capabilities to allocate funds, and support industries as well as micro, small, and medium-sized enterprises (MSMEs) that were severely affected by COVID-19.”

The Chinese authorities have announced other measures to shore up the economy including the recent rescue package for the property market and adjustments in the Covid-19 curbs. 

The RRR cut is the first since April 2022 when the POBC decided to reduce the RRR for all banks in the country by 25 basis points.