Previous RRR Adjustments. Graphics: Globaltimes.cn 

The People's Bank of China (PBC) cut the amount of cash that banks must set aside as reserves in a move to boost liquidity as the world's second-largest economy faces a continued slowdown in growth.

Banks' reserve requirement ratio (RRR) will drop Friday by 50 basic points to 20.5 percent for large commercial banks, the central bank announced Saturday, with the ratio for medium and small-sized banks lowered to 17 percent.

This is the second RRR cut in less than three months. The PBC lowered the ratio in December for the first time since December 2008, following six RRR hikes in an effort to check inflation.

However, this latest adjustment came later than economists expected, with many awaiting the news prior to the Spring Festival.

Lu Zhengwei, an economist with Industrial Bank, suggested the central bank may have postponed the cut by conducting a series of reverse repos before the festival to inject short-term cash into the banking system.

"The latest move did not suggest that the monetary policy would begin to ease since the RRR was to meet the credit crunch brought by previous policies," Lu noted.

China's banking system has been hurt by a credit squeeze as both new loans and foreign exchange funds - the main sources of market liquidity - dropped over recent months.

PBC data showed that banks issued 738.1 billion yuan ($117.18 billion) in new loans in January, down 28 percent year-on-year and much lower than the typical 1-trillion-yuan growth predicted by analysts for the month, as banks usually ramp up lending at the start of the year.

HSBC economist Ma Xiaoping told Dow Jones Newswires that the cut would probably release about 400 billion yuan in liquidity.

"The cut reflects that stimulating economic growth is currently a government priority. January's data reflected downside risks to the economy," Ma said.

Lu Ting, an economist at Bank of America-Merrill Lynch, told the Global Times that recent moves by the central bank were aimed at correcting overly tightening liquidity brought about by previous RRR hiking.

Although the RRR cut will be good for markets in the coming weeks, it is merely part of the ongoing fine-tuning and should not be taken as a sign of bigger monetary easing, said Lu Ting.

By forecasting two more RRR cuts of 50 basic points each within the year, Lu Ting said there would be neither rate cuts nor hikes in 2012.

Jin Qi, an assistant to the PBC governor, said yesterday that the country will maintain a prudent monetary policy as it faces pressure in supporting growth and containing inflation.

"Both the pressure of growth moderation and that of price rises exist at the same time. The current international economic situation remains complicated and grim, while China's economic development is still not balanced, coordinated or sustainable enough," Jin said.

The world's second-biggest economy has been slowing over the last year due to shrinking external demand, the government's tight control over inflation and the property market.

The economy expanded by 9.2 percent in 2011 with the GDP growth rate slowing to 8.9 percent in the fourth quarter.

Credit restriction pushed many SMEs to the brink of bankruptcy last year and fueled an explosion in underground lending as these companies faced difficulties to get loans from banks that tend to favor State-owned enterprises.

"The RRR cut will also help lower inter-bank rates, which will be especially beneficial to small banks that could pass on lower rates to SMEs," Lu Ting said.

The government vowed to back the development of SMEs, especially after the reported bankruptcy wave in coastal regions last year.

In its latest move on Thursday, Shang Fulin, head of the China Banking Regulatory Commission, urged commercial banks to serve the real economy by supporting the development of small enterprises.

However, Lu Zhengwei noted that neither the RRR cut nor the comparatively moderate monetary policy this year could improve the situation for SMEs.

"The credit crunch for SMEs did not result from the capital shortage in banks, and the credit squeeze only made their situation worse in 2011. It was the banks favoring State-owned enterprises that hurt SMEs in getting loans," he said.

Premier Wen Jiabao said last week that the government was paying close attention to the economic situation for the first quarter of this year and that fine-tuning of macro policies should begin in the same period.

Agencies contributed to this story

Global Times Feature

China cuts bank reserve ratio