The People's Bank of China announced on the evening of Feb. 18 that China will lower the RMB deposit reserve ratio for financial institutions by 0.5 percentage points starting next Friday. After the adjustment, the deposit reserve ratio will be 20.5 percent for large financial institutions and 17 percent for small and medium-sized financial institutions, according to non-differential operation principles.

It is the second time since last December that the central bank has lowered the ratio within three years. The adjustment will release 400 billion yuan in circulation regarding the 80.1 trillion yuan balance of savings deposits in January.

Seasonal factors and foreign trade situation are driving force

The deposit reserve ratio cut is mostly due to seasonal factors, said Zhao Xijun, deputy director of the Financial and Securities Institute under Renmin University of China. The credit scale in January reduced inevitably as banks had fewer working days during the Spring Festival, but in February, all kinds of economic businesses start and increase. Under such circumstances, the central bank's move to lower deposit reserve ratio will help boost market liquidity moderately.

According to the financing scale statistics released by the central bank in January, the RMB loans increased 738.1 billion yuan, a decrease of 288.2 billion yuan year-on-year. However, data show that banks' loans usually increase significantly in January, which is proved by the fact that bank's new credits exceeded 1 trillion yuan in each January over the past years.

Zhao noted that the decrease of funds outstanding for foreign exchange is also a reason behind the current lowering of deposit reserve ratio.

China's foreign trade surplus reduced due to the European debt crisis. Capital inflow also decreased as the number of regular trade projects fell. China's funds outstanding for foreign exchange fell successively in October, November and December 2011, down 24.9 billion yuan, 27.9 billion yuan and 100.3 billion yuan, respectively. Although the funds outstanding for foreign exchange in January did not fall, but the total amount failed to make up for the increase of new loans.

Psychological impact on the market

As for the current lowering of deposit reserve ratio, Pan Shiyi, chairman of Soho China Ltd, wrote "good news" on his blog. Real estate tycoon Ren Zhiqiang noted that although being late, it (ratio decrease) finally came.

With regard to the influence on the market, Zhao said that the ratio decrease will not have direct impact on the capital market. The fall of deposit reserve ratio will increase the scale of banks' loans to enterprises, but as banks' capital cannot be directly injected into the market, the current ratio decrease will mostly exert psychological influences, but will result in good psychological expectations.

Analysts pointed out that the overall performance of the stock market is not necessarily related to the deposit reserve ratio and that the market trend is more dependent on basic aspects of the macro economy. Huang Xuejun, an analyst at Guosen Securities, said that the current ratio decrease is helpful to the capital market, but only within a limited degree.

Policy will be more flexible

The central bank's decision to lower deposit reserve ratio should not be interpreted as the shift of China��s monetary policies, Zhao said.

Global economy will face more changes in 2012 when Foreign Direct Investment of developed countries reduces and China's foreign trade will also face serious situation. To keep good fundamentals of the macro economy, financial instruments are bound to be utilized frequently to cope with specific situations. Zhao believed the current adjustment is only fine-tuning, representing the flexibility of monetary policies. As for the goal, timing and methods of structural adjustment, either by deposit reserve ratio adjustment or by open market operations, as well as the amount of currency in circulation, all depend on specific macroeconomic situations.

Xia Bin, member of the monetary policy committee of the central bank and director of the Financial Research Institute at the Development Research Center of the State Council, also noted that the purpose of lowering 0.5 percent of the deposit reserve ratio is to make sure reasonable currency supply according to the goal of maintain prudent monetary policies. On the whole, the basic situation of prudent monetary policies should not, and will not change.