SHANGHAI, Dec. 2 (SMM) -- The People's Bank of China, the country's central bank, said on November 30th that it will lower banks' reserve requirement ratio (RRR) by 50 basis points for the first time in three years. The latest cut, effective on December 5th, 2011, drops the RRR to 21% for large commercial banks and 17.5% for mid- and small-sized banks. An estimated USD 400 billion in capital will be released into the market.
Steelease believes lower China's foreign exchange reserves, slipping CPI growth and weaker PMI prompt the PBOC to cut the RRR. The PBOC has hiked banks' RRR twelfth times since the beginning of 2010 in order to rein in runaway inflation, hiking banks' RRR six times in 1H 2011. A large number of SMEs began to face tight cash crunch in 2H 2011, with both orders and operating rates down. According to the Steelease survey, the PMI of steel downstream industries was below 50% in six months from April to November 2011, and tight credit has created difficulties for downstream enterprises in survival, with many enterprises beginning to lay off a large number of workers. The RRR cut sent a signal of eased monetary policy, bringing hope to SMEs.
The RRR reduction eased cash crunch to a certain extent, and the possible further drop in the CPI growth will give the space and momentum to the PBOC to further ease monetary policy. Production, orders and demand for steel products at steel downstream enterprises will improve after China’s liquidity injection.