China sees room to cut the reserve requirement ratio, the PBOC official told Reuters

BEIJING (Reuters) – China still sees room to reduce the amount of cash banks must hold as reserves, a central bank official said on Thursday, adding that the lender would continue to implement policies to support economic recovery.

“The cut in the reserve requirement ratio (RRR) earlier this year is still showing its effect,” Zou Lan, head of the monetary policy department of the People’s Bank of China (PBOC), told a news conference in Beijing.

The average RRR for financial institutions is around 7% currently, “so there’s still room,” he added.

The PBOC made a 50bps RRR cut for all banks, which took effect on February 5, to support a fragile economic recovery. But indicators showed China’s economy grew much more slowly than expected in the second quarter, dragged down by a prolonged property slump and weak domestic demand.

Zou said the narrowing of banks’ net interest margins would constrain any further cuts in deposit and lending rates, adding that the central bank would reasonably set the strength and pace of policy adjustments based on economic recovery.

Goldman Sachs on Thursday expected the PBOC to cut the RRR by 25 bps in September and a 10 bps cut in the policy rate in the fourth quarter.

An official survey on Saturday showed China’s expanded manufacturing activity fell to a six-month low in August, pressuring policymakers to press ahead with plans to direct more stimulus to households.