China’s central bank today cut the reserve requirement ratio (RRR) of banks for the second time in three months, in a bid to ease the squeeze on short-term credit to boost economic growth.

The cut will drop the RRR by 50 basis points to 20.5 per cent for large commercial banks and 17 per cent for mid- and small-sized banks, the People’s Bank of China (PBOC) said in a statement.

The rates will be effective from February 24 and release an estimated 400 billion yuan ($63.54 billion) capital into the market.

The PBOC in December cut the RRR by 50 basis points for the first time since December, 2008, after hiking the RRR six times last year to check inflation.

“It shows that the focus of the country’s policy is directing from containing prices to stabilising growth, which is also in line with the Government’s intent to finetune macroeconomic policy in the first quarter,” said Li Daxiao, Director of the Yingda Securities Research Institute.

Premier Wen Jiabao said last week that the Government is finetuning the macro policies in the face of falling exports due to global economic crisis and declining growth rate.

Zhao Qingming, a senior researcher said the cut is aimed at finetuning the policies to secure growth as current economic prospects remain gloomy.

The economy has been slowing last year caused by a shrinking external market and the Government’s tightening measures to contain runaway inflation.

China’s economy expanded by 9.2 per cent year-on-year in 2011, with its GDP growth rate dropping to a 10-quarter low of 8.9 per cent in the fourth quarter, according to the National Bureau of Statistics (NBS).

“The cut will help inject liquidity into the banking system, increase banks’ lending capability, and strengthen support to the real economy,” Lian Ping, chief economist at the Bank of Communications told state run Xinhua news agency.

The country’s banking system has been put under credit squeeze as both new loans and foreign exchange funds, main sources of market liquidity, dropped over recent months.

PBOC data showed the new yuan-denominated lending decreased by 288.2 billion yuan year-on-year to 738. 1 billion yuan in January, much lower than the 1-trillion-yuan growth predicted by many economists.

The yuan funds outstanding for foreign exchanges fell by 100.3 billion yuan from November to 25.36 trillion yuan in December, also triggering concerns of capital outflow.

(This article was published on February 19, 2012)
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