Picture: ISTOCK
Picture: ISTOCK

Beijing — China’s central bank says it will cut the amount of cash that some banks must hold as reserves by 50 basis points to accelerate the pace of debt-for-equity swaps and stimulate lending to smaller businesses.

The reserve reduction, the third by the central bank in 2018, had been widely anticipated by investors amid concerns over market liquidity and a potential economic drag from trade disputes with the US.

The targeted cut in some banks’ reserve requirement ratios — currently 16% for large banks and 14% for smaller banks — will take effect on July 5, the People’s Bank of China (PBOC) said on Sunday.

The central bank said targeted reserve requirement ratios cuts will release about 500-billion yuan ($77bn) for the country’s five large state banks and 12 national joint-stock commercial banks. enders are encouraged to use the money to conduct debt-for-equity swaps, it said.

China’s policy makers have been pushing for debt-for-equity swaps since late 2016 to ease pressures from over-borrowing by struggling firms.

The top banks have rushed to sign deals with state-owned enterprises to ease their debt burden and give them time to turn around their business.

Reserve requirement ratios cuts will also release about 200-billion yuan in funding for mid-sized and small banks to increase lending to small businesses, the PBOC said.

The 700-billion yuan liquidity injection into the banking sector had exceeded the market-anticipated 400-billion yuan, said Huatai Securities.

"The intensity of the move exceeded market expectations," Wang Jun, chief economist at Zhongyuan Bank, said.

"This move will help support the real economy and stabilise financial markets. We’ve seen rising debt defaults and funding strains on small firms, as well as a sharp adjustment in the capital market," he said.

But the latest reserve reduction signalled a "policy fine-tuning", not a policy reversal, Wang said.