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Deposit reserve ratio cut does not mean policy shift

(People's Daily Overseas Edition)

16:43, February 21, 2012

The People's Bank of China announced on the evening of Feb. 18 that China will lower the RMB deposit reserve ratio for financial institutions by 0.5 percentage points starting next Friday. After the adjustment, the deposit reserve ratio will be 20.5 percent for large financial institutions and 17 percent for small and medium-sized financial institutions, according to non-differential operation principles.

It is the second time since last December that the central bank has lowered the ratio within three years. The adjustment will release 400 billion yuan in circulation regarding the 80.1 trillion yuan balance of savings deposits in January.

Seasonal factors and foreign trade situation are driving force.

The deposit reserve ratio cut is mostly due to seasonal factors, said Zhao Xijun, deputy director of the Financial and Securities Institute under Renmin University of China. The credit scale in January reduced inevitably as banks had fewer working days during the Spring Festival, but in February, all kinds of economic businesses start and increase. Under such circumstances, the central bank's move to lower deposit reserve ratio will help boost market liquidity moderately.

According to the financing scale statistics released by the central bank in January, the RMB loans increased 738.1 billion yuan, a decrease of 288.2 billion yuan year-on-year. However, data show that banks' loans usually increase significantly in January, which is proved by the fact that bank's new credits exceeded 1 trillion yuan in each January over the past years.

Zhao noted that the decrease of funds outstanding for foreign exchange is also a reason behind the current lowering of deposit reserve ratio.

China's foreign trade surplus reduced due to the European debt crisis. Capital inflow also decreased as the number of regular trade projects fell. China's funds outstanding for foreign exchange fell successively in October, November and December 2011, down 24.9 billion yuan, 27.9 billion yuan and 100.3 billion yuan, respectively. Although the funds outstanding for foreign exchange in January did not fall, but the total amount failed to make up for the increase of new loans.

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