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China Liquidity Squeeze Spurs Debate Over Reserve Ratio Cut

By Leng Cheng and Li Yuqian
As the yuan appears stronger and economic growth is poised to slow further, there is an increasing call for the central bank to lower the reserve requirement ratio for commercial banks. Photo: Visual China
As the yuan appears stronger and economic growth is poised to slow further, there is an increasing call for the central bank to lower the reserve requirement ratio for commercial banks. Photo: Visual China

China’s campaign to curb financial risks and rein in leverage has led to a squeeze on the amount of cash flowing through the financial system and pushed up interest rates in the interbank market where banks borrow from each other.

Although still in the minority, calls are growing for the People’s Bank of China (PBOC) to cut the amount of customers’ deposits lenders have to keep in reserve at the central bank, known as the reserve requirement ratio (RRR), which would release a flood of cash into the system, easing the strain on liquidity and supporting bank lending. The PBOC hasn’t cut the reserve ratio, which stands at 17% for the biggest banks, since March 2016, preferring to use other monetary tools such as open-market operations and its medium-term lending facility (MLF) to adjust liquidity in the market.

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