|Photo taken on Nov. 7, 2011 shows the headquarters building of the People's Bank of China in Beijing, capital of China. The People's Bank of China, the country's central bank, announced Wednesday on its website that it will lower the bank reserve requirement ratio (RRR) by 0.5 of a percentage point as from Dec. 5, 2011. (Xinhua/Liu Jinhai)
BEIJING, Nov. 30 (Xinhua) -- The People's Bank of China, the country's central bank, said on Wednesday that it will lower banks' reserve requirement ratio (RRR) by 50 basis points for the first time in three years in order to replenish liquidity in the country's banking system as inflation eases.
The latest cut, effective on Dec. 5, drops the RRR to 21 percent for large commercial banks and 17.5 percent for mid- and small-sized banks. An estimated 396 billion yuan (62.38 billion U.S. dollars) in capital will be released into the market.
The move signals that the government is set to stabilize economic growth after easing inflationary pressures, although it is not yet known if the change will bring about a full-on move toward a looser monetary policy, analysts said.
Lian Ping, chief economist at the Bank of Communications, said the move is in line with market expectations.
"The reduced RRR rate will ease banks' credit crunch, caused by a high RRR and decreased yuan funds from foreign exchanges, as well as promote reasonable growth in banking loans and stabilize economic growth," Lian said.
PBOC data indicates that yuan funds stemming from foreign exchanges dropped by 24.9 billion yuan month-on-month in October, the first decrease in nearly four years.
In a report released shortly after the central bank's announcement, Bank of America Merrill Lynch (BoAML) said that it also attributes the cause of the cut to limited room for injecting cash via maturing central bank bills and surging liquidity demand during the upcoming Chinese New Year holiday.
PBOC data showed that yuan-denominated deposits fell by 201 billion yuan in October, with residents' deposits down by 727.2 billion yuan, indicating that there is less capital available to banks.
The PBOC has implemented a raft of measures to ease credit controls, including encouraging the banking industry to increase lending to small- and micro-sized enterprises and ensuring sufficient funds for ongoing national projects.
Last week, the PBOC rolled back RRRs for six rural banks in east China's Zhejiang Province to 16 percent from 16.5 percent.
Meanwhile, as government tightening measures gradually take effect and international commodity prices decline, consumer prices have eased in recent months, making it possible to fine-tune China's monetary policy.
The National Bureau of Statistics (NBS) reported a 5.5 percent increase in the Consumer Price Index (CPI) in October, dropping from a 37-month high of 6.5 percent in July.
Lian said he expects the CPI to fall under 4 percent in December and stand around 5.4 percent for the duration of the year.
"While facing volatile external demands and both eased economic growth and inflations, the RRR cut is a signal for stabilizing growth, making the central bank's fine-tuning of the country's monetary policy more explicit," said Zhuang Jian, a senior economist with the Asia Development Bank.
The economy's growth slowed to a two-year low of 9.1 percent in the third quarter of this year, down from 9.7 percent and 9.5 percent in the first quarter and the second quarter, respectively, according to data from the NBS.
China has made stabilizing prices a top priority this year. To rein in runaway inflation, the PBOC has hiked banks' RRR six times and the benchmark interest rate three times this year.
But in its third quarter monetary policy report, the PBOC said it will fine-tune its policies as needed. It did not list keeping stabilizing prices as a priority, which may indicate that the central bank is giving more weight to economic growth than inflationary pressures.
The sharp increase in new yuan-denominated lending, which rose by 116.8 billion yuan month-on-month to reach 586.8 billion yuan in October, was also viewed as a result of the fine-tuning of the nation's monetary policy.
Guo Tianyong, director of the China Banking Research Center at the Central University of Finance and Economics, said that the moves should not be seen as a change in China's current monetary policy stance.
The government should maintain a prudent monetary policy, as consumer prices are still at high levels and the country still needs to contain its red-hot property market, Guo said.
"The RRR cut is merely part of ongoing fine-tuning, which has been taking place since early October," wrote Lu Ting and three other researchers in BoAML's report.
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