China Cuts Some Banks’ RRRs to Steady Liquidity

China’s central bank said on Sunday it would cut the amount of cash that some banks must hold as reserves by 50 basis points to accelerate the pace of debt-for-equity swaps and stimulate lending to smaller businesses.

The reserve reduction, the third by the central bank this year, had been widely anticipated by investors amid concerns over market liquidity and a potential economic drag from trade disputes with the United States, Reuters reported.

Targeted cut in some banks’ reserve requirement ratios, or RRRs—currently 16% for large banks and 14% for smaller banks—will take effect on July 5, the People’s Bank of China said in Sunday’s online statement.

The central bank said targeted RRR cuts will release about 500 billion yuan ($77 billion) for the country’s five large state banks and 12 national joint-stock commercial banks. Lenders are encouraged to use the money to conduct debt-for-equity swaps, it said.

China’s policymakers have been pushing for debt-for-equity swaps since late 2016 to ease pressures from over-borrowing by struggling firms. The country’s top banks have rushed to sign deals with state-owned enterprises to ease their debt burden and give them time to turn around their business and improve their creditworthiness.

RRR cuts will also release about 200 billion yuan in funding for mid-sized and small banks to increase lending to credit-strapped small businesses, the PBOC said.

The combined 700 billion yuan liquidity injection into the banking sector has exceeded the market anticipated 400 billion yuan, according to Huatai Securities.

“The intensity of the move exceeded market expectations,” Wang Jun, Beijing-based chief economist at Zhongyuan Bank, said. “This move will help support the real economy and stabilize financial markets. We’ve seen rising debt defaults and funding strains on small firms, as well as a sharp adjustment in the capital market.”

But the latest reserve cut signaled a “policy fine-tuning”, not a policy reversal, Wang said.

The central bank said it will maintain prudent and neutral monetary policy as it seeks to cultivate an appropriate monetary and financial environment for China’s economic growth and supply-side structural reforms.