The People's Bank of China, the Chinese central bank, is in the process to increase liquidity in the banking system of China to trigger lending, as the latest movements in the Chinese currency market are pushing the Yuan funds out of the industry and fueling concerns over capital, states an official to the central bank.
The central bank is planning to cut down the amount of deposits, which is required to be held in reserves by banks. This move signals that the exchange-rate reversing of the Central bank of China in the previous two weeks has gone wrong and forces the central bank to go back to the reserve-requirement reduction. However, the reserve requirement reduction has also failed to assist in triggering the economic activities in China so far.
The bank will be implementing a reduction of half-percentage-point in the reserve-requirement ratio. This move will potentially release around 678 billion Yuan (US$106.2 billion) in funds for Chinese banks to improve lending.
With this move, the Chinese central bank will post a consecutive third reduction in the reserve requirement in 2015. Alternatively, the People’s Bank of China is planning to target the reduction only at banks, which make large loans to small and private enterprises. However, this strategy has been implemented in past also, which didn’t prove to be efficient enough to credit to borrowers.
As of now the PBOC is concerned upon the expected depreciation that the lowering the reserve-requirement ratio and releasing more liquidity could add to the Yuan.