(Yicai Global) March 20 -- To keep liquidity in China’s banking system ample, the central bank announced this year’s first cut to the reserve requirement ratio at the end of last week. According to analysts, there is still room for further lowering the amount of cash banks must hold in reserve.

The People's Bank of China will cut the RRR for domestic financial institutions by 0.25 basis points to about 7.6 percent from March 27, it said on March 17. The move is expected to free up about CNY600 billion (USD87.1 billion) of medium- and long-term funds.

The RRR can be further reduced as the level at banks is still relatively high after the latest cut, Dong Ximiao, chief researcher at Merchants Union Consumer Finance, told Yicai Global. The PBOC will use more structural monetary policy tools to enhance its support for key areas and weak links in China’s economic development, he noted.

The loan prime rate, the benchmark lending rate, could fall this month or next as the RRR cut will trim banks’ funding costs, Dong added. As a result, mortgage rates linked to the LPR would fall, easing the burden on homebuyers, thereby boosting the propensity to consume, he said.

Overseas banking sector risks are rising and global liquidity is under pressure, so although China's main economic indicators rebounded in the first two months of 2023, the foundations for an overall recovery are not yet solid and the country’s monetary and fiscal policies need to continue to work hard, said Wen Bin, chief economist at China Minsheng Bank.

To better guide financial institutions in supporting the real economy, the PBOC continues to free up mid- and long-term liquidity via RRR cuts while increasing the provision of medium lending facilities, Wen pointed out. This will consolidate the economic pickup and the stable operation of the banking industry, according to Wen

The value-added of industrial enterprises above a designated size rose 2.4 percent during Janaury and February from a year earlier, according to data the National Bureau of Statistics released on March 15. The production index for service sector jumped 5.5 percent, with total retail sales of consumer goods growing 3.5 percent and investment in fixed assets, excluding rural housing, jumping 5.5 percent.

Editors: Dou Shicong, Martin Kadiev