Reducing deposit reserve ratio releases funds for restructuring

THE PEOPLE'S BANK OF CHINA said it will lower the deposit reserve ratio for commercial banks by 0.5 percentage points on July 5, the third time this year, which will release about 700 billion yuan ($107 billion) to support debt-for-equity swaps and financing of small and micro-sized businesses. Economic Daily comments:

Flexibility and responsiveness are two key characteristics of the authorities' monetary policy. Lowering the deposit reserve ratio is a conventional currency policy tool that should not be subject to over-speculation. The country's stable neutral monetary policy remains unchanged.

In recent years, every time the central bank has changed the deposit reserve tool, it has triggered market speculation about the direction of monetary policy. This time has been no exception. But China's monetary policy remains prudent, and the cash flow will be diverted to facilitate the country's economic restructuring.