In order to guide financial institutions to increase support for small and micro enterprises, increase the stability of the banking system funds, and optimize the liquidity structure, the People’s Bank of China decided to cut large-scale commercial banks and joint-stock commercial banks from April 25, 2018 onwards. The city's commercial banks, non-county rural commercial banks, and foreign banks’ renminbi deposit reserve ratio will be 1 percentage point; on the same day, the above banks will each use the funds released by the RRR reduction to repay the central bank’s borrowing Loan facility (MLF).
The People's Bank of China will continue to implement a stable and neutral monetary policy, maintain a reasonable and stable liquidity, and guide the stable and moderate growth of money and credit and social financing, and create a suitable monetary and financial environment for high-quality development and supply-side structural reforms.
Relevant person in charge of the People's Bank of China stated that: Judicature will be replaced to ease the mid-term borrowing facility, and the stable and neutral monetary policy will remain unchanged
1. How will the convenience of replacing medium-term borrowings through the RRR cut?
A: The operation of downgrading of certain financial institutions and the replacement of medium-term borrowing facilities (MLF) mainly involves large-scale commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks, and foreign banks. These types of banks currently deposit funds. The base rate for the reserve ratio is relatively high at 17% or 15%, and institutions that borrow MLF are among these types of banks. Other financial institutions with a low reserve requirement ratio are not in this operating range. The specific operation is divided into two steps: the first step, starting from April 25, 2018, the reduction of the renminbi deposit reserve ratio of the aforementioned types of banks by 1 percentage point; the second step, on the date of the RRR cut, banks holding unexpired MLFs. In accordance with the order of “first borrow first, return first”, the capital released by the RRR cut will be used to repay the MLF borrowed by the central bank, slightly less than the MLF that needs to be repaid. Based on the data at the end of the first quarter of 2018, the repayment of MLF on the day of operation was about 900 billion yuan, while the release of incremental funds was about 400 billion yuan. Most of the incremental funds were released to city commercial banks and non-county rural commercial banks.
2. What are the main considerations for replacing the medium-term borrowing facilities through the RRR cut?
A: At present, China's small and micro enterprises still face difficulties in financing and expensive financing. In order to increase the support for small and micro enterprises, some central bank loan funds can be replaced by appropriately reducing the statutory deposit reserve ratio, further increasing the stability of the banking system funds, optimizing the liquidity structure, and appropriately releasing incremental funds. Specifically, the first is that it can increase long-term funding, and the cost of bank funds will be reduced. The replacement of MLF has reduced the cost of interest paid by commercial banks, which will help reduce corporate financing costs. The second is to release 400 billion yuan in incremental funds, which increased the low-cost funding sources for small and micro enterprise loans. The PBOC will require relevant financial institutions to use the new funds mainly for the loans of small and micro enterprises, and appropriately reduce the financing costs of small and micro enterprises, and improve the financial services to small and micro enterprises. The above requirements will be included in the macro-prudential assessment (MPA) assessment.
3. Does the RRR cut mean that the orientation of monetary policy changes?
A: The stable and neutral monetary policy remains unchanged. Most of the funds released this time are used to repay medium-term borrowing facilities, which is a substitute for two kinds of liquidity adjustment tools. The remaining small amount of funds is opposed to the tax period in mid-to-late April. Therefore, the liquidity is optimized. At the same time as the structure, the total amount of liquidity in the banking system remained basically unchanged and remained neutral. At the same time, we must also see that China is a developing country. To prevent financial risks, it is still necessary to maintain a relatively high reserve requirement ratio. The People's Bank of China will continue to implement a stable and neutral monetary policy, maintain a reasonable and stable liquidity, and guide the stable and moderate growth of money and credit and social financing, and create a suitable monetary and financial environment for high-quality development and supply-side structural reforms.
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