Lenders Can Dip Into Reserves to Meet Holiday Cash Demand

The People’s Bank of China (PBOC) said Friday it will allow national lenders to use some of their reserves parked at the central bank to meet their liquidity needs, as demand for cash is expected to spike in the run-up to the Lunar New Year.

The central bank has decided to establish a mechanism that permits commercial lenders operating nationwide to tap a portion of the funds they are required to hold in reserve in order to make up shortfalls of cash during the Lunar New Year, which falls on Feb. 16.

Under the “Temporary Reserve Usage Arrangement,” the banks can lower their reserve requirement ratios (RRRs) by as much as 2 percentage points for up to 30 days, the PBOC said in a statement. Currently the RRRs of national lenders range roughly from 15% to 17%.

The mechanism is aimed at “meeting the commercial banks’ contingent need for liquidity due to massive demand for cash prior to the Lunar New Year, promoting the stable operation of the money market, and supporting financial institutions to provide quality services before and after the Lunar New Year,” the statement said.

In previous years, the central bank routinely injected cash through open market operations in the run-up to the Lunar New Year to quench banks’ thirst for liquidity as consumers withdraw cash to spend during the country’s most important holiday.

The arrangement for the use of bank reserves will provide a more flexible way to ease the potential liquidity squeeze, Claire Huang, a Hong Kong-based economist with Societe Generale, told Caixin.

“The RRRs are quite high at the moment and lock up an enormous amount of funds, so the PBOC may feel that it is fine to use some of that money,” she said, adding that this approach is more flexible and means the PBOC doesn’t have go to the trouble of “conducting more open market operations after the Lunar New Year to drain liquidity.”

Only national lenders are covered by the policy, likely because they are under greater pressure to honor cash withdrawal requests, Huang said. She estimates that the move could allow up to 1.5 trillion yuan ($229 billion) to flow into the market.

Contact reporter Fran Wang (fangwang@caixin.com)