Reserve Requirements to be Lowered to Allow Banks to Free Up more Capital

Reserve Requirements to be Lowered to Allow Banks to Free Up more CapitalChina is planning to lower the reserve requirement to allow banks to free up more additional cash for loans as the government seeks to increase growth in the world’s second biggest economy. The reserve requirement of the level of deposits that commercial banks to hold at the central bank will be reduced especially to those banks whose lending is pushing the real economy.

Whether these banks qualify for a lower reserve or not will be dependent on whether their loans to smaller firms and in the farming sector will account for a certain proportion of the total lending. This will be the second time in several months that the country has lowered its reserve requirement in selected banks in efforts to encourage more corporate lending and boost economy that is said to be suffering its worst slowdown in 25 years. the plans to continue loosening policies even in small steps only underscores the government’s determination in keeping the economy moving at a healthy pace to provide a stable backdrop for more sweeping reforms.

As more enterprises to expect more policies to be released to ease measures for the third quarter, it might take a form of a targeted and gradual cut that have differential effect on different banks in a much less transparent way. Other pro-growth measures will also be made which will inclue instructions to banks to speed up its lending and for the central bank to disburse more loans to commercial banks in a scheme known as re-lending.

Administrative fees will also be cut to lower the cost of doing business. The central bank has already conducted to last re-lending exercise last week after approving loans of more than 300 billion yuan to China Development Bank to do refurbishment works in several towns. These re-lending schemes are a way to increase money supply in the system and help lift economic growth.

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