The People's Bank of China (PBOC) said the cut in the required reserve ratio (RRR) would lower the cost of capital for financial institutions by about 13 billion yuan, adding this will help bridge a liquidity gap during a peak period when medium-term loans mature and taxes are paid in mid-to-late July.
"The orientation of prudent monetary policy has not changed," a spokesman said in a statement on PBOC's website, adding the RRR cut is a routine operation as monetary policy returns to normal after last year's response to the COVID-19 pandemic.
PBOC operates three different reserve ratios depending on the type of financial institution and said today's cut was comprehensive and only excluded financial institutions that already had a 5.0 percent deposit reserve ratio, which is already the lowest.
"The purpose of this RRR cut is to optimize the capital structure of financial institutions, improve financial service capabilities, and better support the real economy," the PBOC spokesman said.
The last time PBOC cut the reserve ratio for large banks, which includes state-owned banks such as the Industrial & Commercial Bank of China, was in May 2020, when it was lowered to 11.0 percent.
That move on May 26, 2020 was PBOC's second cut in RRR for large banks following an earlier cut in January that year as it began loosening its monetary policy stance in the early days of the pandemic.
Since the first cut in RRR for large financial institutions on Jan. 2, 2020, the rate has been lowered by a total of 250 basis points and now stands at 10.50 percent.
The weighted average RRR for all financial institutions is 8.9 percent.
Following the cut in the reserve ratio for large banks in January, PBOC in February last year injected large amounts of liquidity into the banking system to prevent a financial crises and followed this up with a cut in its benchmark lending rate, the Loan Prime Rate, on Feb. 20 and then another cut on April 20.
PBOC's move comes the day after China's State Council, the equivalent of the cabinet, said it wanted financial institutions to reduce fees, make profits and benefit enterprises and people. It also hinted PBOC could boost lending to businesses by lowering the amount of funds banks hold in reserve.
China's economy has been slowing in recent months and inflation in June declined to 1.1 percent from an 8-month high of 1.3 percent in May as food costs fell.
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