China's central bank is making its reserve requirement rules more flexible for banks to reduce the risk of an abrupt tightening in liquidity in the world's second-largest economy as it cools.
The amount of deposits that banks must set aside as reserves at the central bank will soon be regulated on an average basis as opposed to current daily assessments, the People's Bank of China (PBOC) said in a statement on its website.
The change, effective Sept. 15, will help banks combat sudden funding pressures at a time of heightened volatility in the yuan that has driven capital from China.
In two online statements, the PBOC said the new rule would allow banks to set aside less reserves when they are strapped for funds, but will not be a free pass for lenders to lapse into overdrafts.
Under the changes, banks can report a daily reserve requirement ratio (RRR) that is up to 100 basis points lower than the rate set by the PBOC, but their daily average RRR in the assessed period cannot fall under the required level.
The PBOC did not state the period over which banks' RRR will be assessed.
"It could release a certain amount of liquidity when there is a shortfall," the PBOC said of the rule, but added it would not affect the market now as there was ample liquidity.
The RRR is a main monetary policy tool in China, used to manage liquidity.
As China's economy eases towards its slackest growth in 25 years, the PBOC has lowered the RRR three times this year by a total of 200 basis points to bolster bank lending.
The PBOC sets different RRR requirements for banks depending on their size and type of loans. The RRR for the largest banks is around 18 percent, but the exact level for each bank is not disclosed.
"This helps to reduce volatility in liquidity," said Li Qilin, an analyst at Minsheng Securities in Beijing.
"The (yuan) exchange rate is under pressure to depreciate and money flows are very volatile, which could affect the cash positions (of banks)," Li said. "This helps smooth it out."
China's foreign exchange market experienced its most volatility in a decade this year when the PBOC unexpectedly devalued the yuan by around 2 percent in August, saying it would deepen reforms.
Faced with suspicion China may have started a round of competitive devaluations, which authorities deny, the PBOC has aggressively intervened to prop up the yuan.
China suffered a bruising credit crunch in June 2013 when short-term interest rates shot as high as 30 percent after the PBOC allowed the money market to convulse to force banks to curtail risky lending.
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