Bloomberg News

July 13, 2021

The recent cut in the amount of money banks must keep in reserve doesn’t mean a change in the China’s monetary policy, the People’s Bank of China said.

“The RRR cut is a standard liquidity operation after monetary policy returned to normal and the prudent monetary policy direction has not changed,” Sun Guofeng, head of the central bank’s monetary policy department, said at a press briefing Tuesday. That was a reiteration of what the bank said when it announced the reduction last Friday.

Monetary policy will be kept flexible, targeted, reasonable and appropriate, Ruan Jianhong, head of the statistics and analysis department at the bank, said at the same briefing. The RRR cut will help lower aggregate financing costs, she said.

The PBOC announced Friday it would cut the reserve requirement ratio by 0.5 percentage point for most banks, the first reduction since the height of the pandemic last year. The move went further than many economists had expected and suggested growing concerns about the economy’s faltering recovery.

The cut will take effect Thursday and will release 1 trillion yuan ($155 billion) of long-term liquidity into the economy. It underscores the divergence between China’s macro policy and that of the U.S., where the Federal Reserve is accelerating its projection of stimulus tapering.

The move has stoked debate about whether a new policy easing cycle is beginning, even though most analysts think the likelihood of an interest rate cut this year is low.

China’s credit growth has basically matched the pace of nominal gross domestic product expansion in the first half of 2021 and will continue to do so for the rest of the year, Ruan said. Credit expansion in June was stronger than expected, with a large rise in new loans indicating the central bank has slowed its tightening of credit policy amid increasing uncertainties in the economy’s recovery.

China will create an appropriate monetary environment to support high-quality development in the second half of the year, Sun said, adding that the central bank will maintain monetary policy autonomy and base policy on domestic price levels and economic conditions.

The officials dismissed concerns around surging producer prices, saying the increase is temporary and price levels are basically under control. PPI is expected to remain at elevated levels into the third quarter before slowing in the fourth quarter and next year, Sun said.

— With assistance by Yujing Liu