China’s Central Bank Identifies Opportunity to Lower Reserve Buffers for Economic Growth, Reports Reuters

By Kevin Yao

BEIJING – China has the capacity to further lower the reserve requirements for banks, even as the central bank faces certain limitations in reducing interest rates, a central bank official stated on Thursday. This comes as part of efforts to support the nation’s struggling economic recovery.

The People’s Bank of China (PBOC) has been progressively lowering interest rates and injecting liquidity into the economy this year. There is mounting pressure on the bank to take additional measures to ensure that the economy grows at approximately 5% this year, aligning with the government’s target.

Currently, the average reserve requirement ratio (RRR) for financial institutions stands around 7%. Zou Lan, head of the bank’s monetary policy department, noted during a media briefing that there is "some room" for adjustments. He emphasized that the central bank would consider emerging economic trends before implementing any changes and is closely observing policy shifts in major economies.

Since 2018, the PBOC has reduced the weighted average RRR from nearly 15% to its current level, infusing over 12 trillion yuan into the economy. A notable RRR cut of 50 basis points took effect for all banks on February 5; however, indicators suggest that the economy grew at a much slower pace than anticipated in the second quarter, largely due to a prolonged downturn in the property sector and subdued domestic demand.

Goldman Sachs projected on Thursday that the PBOC is likely to implement a 25 basis points RRR cut in September, along with a 10 basis points reduction in the policy rate in the fourth quarter. An official survey released over the weekend indicated that China’s extensive manufacturing activity dropped to a six-month low in August, prompting policymakers to consider additional stimulus directed at households.

Zou mentioned that the declining net interest margins for banks may limit further cuts in deposit and lending rates. Lu Lei, deputy governor of the central bank, reassured that the PBOC will maintain a supportive monetary policy, aiming to decrease corporate financing costs and credit costs for households steadily.

Zou also indicated that the central bank plans to guide market interest rates to align more closely with its main policy rate—the seven-day reverse repo rate—as it transitions from quantitative measures to price-based tools like interest rates. The PBOC seeks to reframe its policy framework to focus on the cost of credit rather than its total volume; however, liquidity risks and market challenges are complicating the shift away from state-controlled bank lending.