China’s Reserve Ratio Cut May Heighten Companies’ and Banks’ Financial Risk
Commentary
On Nov. 25, China’s central bank announced its plan to cut the reserve ratio by 0.25 percent points, effective on Dec. 5, 2022. This would release 500 billion yuan ($69.7 billion) worth of long-term liquidity to the market. However, this move may not effectively boost the economy, but instead increase the financial risk for both corporations and banks.
This is the second cut of the reserve ratio in 2022, after the first cut on April 25, and will bring the weighted average reserve ratio of financial institutions down to 7.8 percent.
Banks and other financial institutions are required to maintain a certain percentage of bank deposits as a reserve with the central bank to ensure that it has the ability to meet liabilities in case of sudden withdrawals, which also provides banks a level of protection. The cut of the reserve ratio will increase the bank’s lending capacity and improve the liquidity of the market, which is expected to stimulate the overall economy….