China: Reserve Requirements, GFC

In 2008, China experienced several natural disasters that slowed economic growth, and fearing contagion from the Global Financial Crisis (GFC), the central bank cut the reserve requirement ratio (RRR) three times for large financial institutions, to 15.5%, and four times for small and medium-size financial institutions, to 13.5%. This monetary easing, combined with a USD 586 billion fiscal stimulus package, caused explosive credit growth in China. One year after these RRR cuts, the central bank hiked the ratio 12 times, to a historically high 21.5% for large banks in June 2011; however, it maintained a different ratio for rural credit cooperatives that averaged 300 basis points lower than the RRR for large banks. The People's Bank of China (PBOC) adjusted the reserve requirement ratio 35 times between July 2006 and June 2011. Throughout this cycle, the central bank's approach to required reserves policy evolved from a relatively simple regime that applied one ratio to all financial institutions into a complex regime that applied different ratios to individual firms based on size, location, and financial and macroprudential criteria. The central bank increasingly favored the RRR as a cost-effective monetary policy and crisis management tool over which it had greater autonomy than its two other major policy tools: interest rate management and central bank bill issuance. The PBOC said the RRR cuts released USD 117 billion of liquidity into the system.