By Liu Peng (刘鹏)
Economic Observer Online
Nov 30, 2011
Translated by Zhu Na
Original Article: [Chinese]

China's central bank will lower the percentage of deposit that banks are required to hold in reserve by 0.5 percentage points on Dec. 5, according to an announcement posted to the official website of the People's Bank of China at around 7pm last night.

This is the first time in 3 years that the central bank has lowered the required reserve requirement (RRR) and is an indication that the central bank may gradually be starting to loosen monetary policy settings.

Last night's announcement came earlier than many market analysts were expecting.

The last time that the People's Bank of China raised the RRR was on Jun. 20 this year, when it raised the RRR of large financial institutions to an historic high of 21.5 percent.

Lu Zhengwei (鲁政委), chief economist with China's Industrial Bank, believes that the central bank's decision to go early was a direct response to the sudden slump seen during trading yesterday in China's capital markets, he says that the move was an attempt to calm the market.

However, Lu also said that one underlying factor that caused the central bank to act, could be related to the lowering of expectations that the RMB will appreciate, which in turn is leading to an increase in international capital outflows, which in turn gives the central bank more room to move as the amount of liquidity in the capital markets is receeding.

Central Bank data shows that by the end of October, there were almost 80 trillion in RMB-denominated deposits stored in Chinese banks. If we extrapolate from this figure, we can estimate that by lowering the RRR by 0.5 percentage points, the central bank will be releasing approximately 400 billion yuan into the market.