China's Central Bank Injects Liquidity
China’s central bank has cleared the way to inject $US100 billion in new funds to help soften the blow from any trade war with the United States.
In a move late Sunday, the central bank cut the amount of cash that some banks must hold as reserves by 50 basis points (bps) in a move designed to stimulate lending to smaller businesses or support those feeling the pain of too much debt.
The reserve cut is the third from the central bank this year and had been widely forecast amid concerns over market liquidity and the potential for the US trade war dramas to damage small to medium businesses.
The targeted cut in some banks’ reserve requirement ratios (RRRs) - currently 16% for large banks and 14% for smaller regional and local banks - will take effect on July 5.
The central bank said targeted RRR cuts will release about 500 billion yuan ($US77 billion) for the country’s five large state banks and 12 national joint-stock commercial banks. The lenders are being encouraged to use the money to conduct debt-for-equity swaps, it said.
This is a a recently introduced program in which banks write off debt to heavily indebted firms in a restructuring in return for equity stakes.
Lest anyone think this is a bailout of all high debt companies, the central bank made it clear in its online statement that the new funds should not be used to help “zombie” companies with no hope of recovery.
The reserve cuts will also release about 200 billion yuan in funding for mid-sized and small banks to increase lending to credit-strapped small businesses, the PBOC said.
The central bank said it will maintain a neutral and prudent monetary policy as it seeks to cultivate an appropriate monetary and financial environment for China’s economic growth and supply-side structural reforms. That means it will continue to keep market liquidity topped up and won’t allow any funds shortage to squeeze rates.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.