BEIJING - China's latest cut in its reserve requirement ratio (RRR) signalled more bold pro-growth measures on the horizon against rising economic headwinds.
The People's Bank of China (PBOC) announced on Monday it will reduce the RRR for banks by 0.5 percentage points, the first such operation since October. Specifically, the RRR will be 17 percent for large banks and 15 percent for smaller institutions.
The decision surprised the market as the PBOC has conducted open market operations and lending facilities more frequently, rather than RRR or interest rate cuts, to pump cash into the market in recent months for fear of further slips by the yuan.
Central bank governor Zhou Xiaochuan disclosed a fine-tuning of China's policy stance, shifting from a "prudent" monetary policy to one that is "prudent with a slight easing bias" during a G20 meeting concluded Saturday in Shanghai.
The authorities are sending a clear signal of policy accommodation as the yuan has shown signs of stabilizing, UBS economist Wang Tao said.
The central parity rate of the yuan strengthened 67 basis points to 6.5385 against the US dollar on Tuesday.
The cut aims to ensure ample liquidity on the market and create a favorable environment for structural reform, according to a statement released by the central bank.
CICC Macro, a domestic economic research institution, described the move as "a reasonable choice" to replenish domestic liquidity that has been squeezed by capital outflows.
China's yuan funds outstanding for foreign exchange dropped 644.5 billion yuan ($100 billion) in January following an even deeper plunge in December due to depreciation expectations for the yuan, China's currency.
"Given looming downward pressure, the lowering will boost credit, unleash liquidity and help the economy to hold steady, as well as facilitate ongoing reforms," said Guo Tianyong, a professor at Central University of Finance and Economics.
Analysts believe the RRR cut suggested that economic regulators will continue to prop up growth by rolling out easing measures amid economic overhauls.
Easing policies should continue as supply-side reforms cannot take effect quickly, said Liu Dongliang, a researcher with China Merchants Bank. "Such decisive actions [easing measures] by the government can soothe market jitters and boost confidence in the real economy," he said.
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