China will reduce the reserve requirement ratio (RRR) by 50 basis points, as announced by People's Bank of China (PBOC) Governor Pan Gongsheng during a press conference on Tuesday.
Commercial banks must maintain a reserve ratio that determines how much cash they should keep in cash if mass withdrawals of customers occur. The reserve ratio is determined by the central bank.
While Pan did not specify an exact timeline for the policy adjustment, he indicated that it would occur by the end of the year.
The announcement follows the U.S. Federal Reserve's 50 basis point interest rate cut last week, which has created additional room for China’s central bank to implement rate reductions and stimulate growth amid deflationary pressures.
Since taking office in July 2023, Pan has reiterated the importance of adjusting the RRR to enhance liquidity in the banking system.
In March, alongside China's annual parliamentary meeting, Pan noted that there was scope for further RRR cuts, which are now widely anticipated in the upcoming months.
Unlike the Fed's primary focus on a single interest rate, the PBOC employs a range of rates to manage its monetary policy effectively.
Despite the Fed's recent adjustments, the PBOC maintained its loan prime rate last Friday, which influences borrowing costs for corporate and household loans, including mortgages.
Following the Fed's decision, the PBOC has opted to lower a short-term rate—the 14-day reverse repo rate—by 10 basis points to 1.85%, while keeping the 7-day reverse repo rate unchanged at 1.7%. Pan also expressed interest in positioning the 7-day rate as the primary policy tool.
