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By Yin Lei

The 100-basis point cut to the reserve requirement ratio (RRR) by China’s central bank will unleash more liquidity and benefit the A-share market, according to an article in the China Securities Journal on Sunday.

On Oct. 7, the People’s Bank of China (PBOC), China’s central bank, announced that starting from Oct. 15, the RRR will be lowered by 100 basis points for large commercial banks, joint-stock commercial banks, urban and rural commercial banks, and banks owned by foreign investors.

The goal of this adjustment, according to the PBOC’s announcement, is to shore up the real economy, improve liquidity in commercial banks and financial markets, reduce financing costs, and encourage financial institutions to strengthen support for small and medium-sized enterprises, the private sector and innovative firms.

With this move, the RRR for large banks and their small and medium-sized counterparts will stand at 14.5 percent and 12.5 percent respectively, and liquidity totaling 1.2 trillion yuan, or 173.3 billion US Dollars, can be released, according to the estimate by Zhang Ming, chief economist of Ping An Securities Co., Ltd.

Deducting the medium-term lending facility (MLF) worth 450 billion yuan, or 65 billion US Dollars offered to banks by the PBOC as a source of funds and scheduled for repayment on Oct. 15, these financial institutions will have a remaining 750 billion yuan, or 108.3 billion US Dollars.

Experts pointed out that the additional liquidity freed up would bring a boost not only to the real economy but also to the A-share market, which was closed for nine consecutive days before and during China’s National Day holiday.

During this period, the global stock markets experienced days of turmoil, with the Hong Kong Hang Seng Index tumbling by 4.38 percent and the MSCI Emerging Market Index down by 4.5 percent from Oct. 1 to Oct. 5. The overseas bond markets suffered too.

Against this backdrop, the lowered RRR can help stabilize market sentiments and boost investors’ confidence at home, said Liu Guanghuan, an investment expert at the New Times Securities Co., Ltd.

This RRR adjustment, with its announcement timed at the end of the National Day holiday, is essentially meant to cushion the negative impacts from the drops at the global stock and bond markets, according to the research team of the China Merchants Securities Co., Ltd.