China releases $56 billion to banks in virus response

China's central bank said Friday it would cut the reserve requirements for smaller banks to release around 400 billion yuan ($56.3 billion) in liquidity, a move to counter the coronavirus impact on enterprises.

The People's Bank of China (PBOC) said in a statement it will also slash the interest it pays on financial institutions' excess reserves for the first time in 12 years, to encourage them to use the cash rather than store it with the central bank.

The moves are the latest in a series of fund injections to help the world's second-largest economy through the fallout from the COVID-19 crisis. The reserve requirement ratio (RRR) for small and medium-sized banks will be cut by 100 basis points over two tranches, on April 15 and May 15 respectively, said the PBOC.

This reduces the amount of cash the banks must hold and is aimed at boosting support for small, medium and micro enterprises, the PBOC added. The cuts target rural financial institutions and city commercial banks that operate only at the provincial level.

While China's larger enterprises have mostly resumed near-regular operations as the country eased restrictions aimed at curbing the coronavirus spread, smaller firms have been lagging behind.

The aim is to "effectively increase stable funding sources" and help reduce the interest rates that enterprises are subject to, said a PBOC spokesman Friday.

The measure is also expected to benefit around 4,000 smaller banks, which make up the vast majority of institutions in the banking system.

The PBOC said Friday it will also be reducing the interest rate on banks' excess deposits from April 7, from 0.72 percent to 0.35 percent. It pays interest on banks' excess reserves, and the last time it adjusted the rate was in 2008.

ING chief economist for Greater China Iris Pang said: "The cut suggests that damages from the coronavirus outbreak globally could linger at least until May."

But she added the effectiveness of the RRR cuts remains questionable as the reserve ratio for smaller banks is already low, and that banks have been reluctant to lend to troubled SMEs in the pandemic.

On Tuesday, China had said it would increase the financing quotas of small- and medium-sized banks by one trillion yuan, with authorities intending to guide smaller banks to lend all the funds they receive at preferential rates.