The Effect of RRR Cut to the Money Market
Introduction
The news article published in Bloomberg website on 16 June 2014 reported that China Central bank has extended a half-point Required Reserve Ratio (RRR) cut at banks, as part of the efforts in line with its recent stimulus moves to rebalance the economic growth rate. According to the news, the policy easing applied to nearly two-thirds of commercial banks in the city, 80 percent of non-county level rural commercial banks and 90 percent of non-county level rural cooperative banks. The cut aimed to selectively loosen the lending control imposed to the banks earlier, targeting to provide credit aid to small businesses, agriculture sector and exporters. China has experienced a decelerating growth in recent years as it started seeing a single digit GDP growth as opposed to the decades long double-digit GDP growth. Recently, China government has taken several steps to sustain the high growth rate and meet the forecasted GDP growth %; one of them is by cutting the RRR at bank. This paper will elaborate the effect of RRR cut to the money market and how it would help to rebalance the economy in short term. On long term economic growth, China faces several challenges to sustain its growth base on capital intensive, industry focused and export oriented strategy. The effects of controlled fertility rate, rapid urbanization of sub-cities and inland without sustainable population density as well as the “closed” market directly intervened by the government are also the growth inhibiting factors looked at.
Required Reserve Ratio and Money Supply
China has had unfavorable credit growth in the past few years that led to financial imbalances. The main driver of such was the excessive lending to high risk sectors when the previous stimulus packages were released, causing the country to have the highest corporate debt to GDP in Asia. Central bank thus made extensive efforts to restrict lending and credit product creation. As a result, the interbank rates surged in 2013
The news article published in Bloomberg website on 16 June 2014 reported that China Central bank has extended a half-point Required Reserve Ratio (RRR) cut at banks, as part of the efforts in line with its recent stimulus moves to rebalance the economic growth rate. According to the news, the policy easing applied to nearly two-thirds of commercial banks in the city, 80 percent of non-county level rural commercial banks and 90 percent of non-county level rural cooperative banks. The cut aimed to selectively loosen the lending control imposed to the banks earlier, targeting to provide credit aid to small businesses, agriculture sector and exporters. China has experienced a decelerating growth in recent years as it started seeing a single digit GDP growth as opposed to the decades long double-digit GDP growth. Recently, China government has taken several steps to sustain the high growth rate and meet the forecasted GDP growth %; one of them is by cutting the RRR at bank. This paper will elaborate the effect of RRR cut to the money market and how it would help to rebalance the economy in short term. On long term economic growth, China faces several challenges to sustain its growth base on capital intensive, industry focused and export oriented strategy. The effects of controlled fertility rate, rapid urbanization of sub-cities and inland without sustainable population density as well as the “closed” market directly intervened by the government are also the growth inhibiting factors looked at.
Required Reserve Ratio and Money Supply
China has had unfavorable credit growth in the past few years that led to financial imbalances. The main driver of such was the excessive lending to high risk sectors when the previous stimulus packages were released, causing the country to have the highest corporate debt to GDP in Asia. Central bank thus made extensive efforts to restrict lending and credit product creation. As a result, the interbank rates surged in 2013
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