China Lowers Reserve Requirement Ratio as International Commodity Prices Rise

Following Changes in Deposit Interest Rate Calculation, Reserve Requirement Ratio Also Lowered After 15 Months
Support Measures for SMEs Struggling Due to Soaring International Commodity Prices

[Asia Economy Beijing=Special Correspondent Jo Young-shin] China’s financial authorities are expected to cut the reserve requirement ratio (hereinafter RRR) as early as the 9th. It is interpreted as an intention to support the real economy through an RRR cut, judging that the sharp rise in international raw material prices is affecting production and consumption.

According to the Chinese government’s official website, the State Council held an executive meeting chaired by Premier Li Keqiang the day before, discussing the direction of monetary policy including an RRR cut. China had cut the RRR three times last year in January, March, and April due to the impact of COVID-19.

People's Bank of China (Photo by Baidu)

China’s economy has been showing signs of normalization since the second half of last year after the shock of COVID-19, but the recent sharp rise in international raw material prices is placing considerable burdens on production and consumption sectors.

In fact, China’s Producer Price Index (PPI) rose by 9.0% in May, marking the highest level in 13 years since 2008. Some Chinese manufacturing companies are reportedly struggling with deteriorating profitability as they cannot fully pass on the increased raw material costs to product prices.

China’s RRR cut is a support measure for small and medium-sized enterprises (SMEs) struggling due to rising international raw material prices. When the RRR is lowered, banks’ lending capacity increases. Previously, the People’s Bank of China, the central bank, changed the method of calculating deposit interest rates for commercial banks, lowering the interest rates on medium- to long-term deposits of one year or more. This change in calculation method has led to an increase in SME loans by commercial banks.

Regarding the RRR cut, the State Council stated, “We will maintain the continuity of monetary policy on the premise of not practicing ‘Da Su Man Guan’ (an irrigation method of flooding farmland).”