By Kevin Yao

Beijing (Reuters)

China still has room to lower bank reserve cash requirements while facing constraints on interest rate cuts, a central bank official stated Thursday, aiming to support the country’s recovering economy.

The People’s Bank of China (PBOC) has been reducing interest rates and injecting liquidity this year, under pressure to maintain an economic growth rate of around 5% in line with government targets.

Currently, the average reserve requirement ratio (RRR) for financial institutions stands at approximately 7%. “So there is some room,” stated Zou Lan, head of the bank’s monetary policy department, during a media briefing.

The central bank will consider developing economic trends before making adjustments and is closely monitoring policy changes globally.

Since 2018, the PBOC has significantly reduced the weighted average RRR from nearly 15%, injecting over 12 trillion yuan into the economy. A notable 50-bps RRR cut took effect on February 5, yet subsequent indicators revealed slower-than-expected economic growth in the second quarter, hindered by a prolonged property downturn and weak domestic demand.

Goldman Sachs anticipates the PBOC will implement a 25-bps RRR cut in September and a 10-bps policy rate cut in the fourth quarter.

Recent official surveys indicated a decline in China’s manufacturing activity to a six-month low in August, increasing pressure on policymakers to extend stimulus efforts to households.

Zou highlighted that narrowing net interest margins for banks would limit further reductions in deposit and lending rates.

Deputy central bank governor Lu Lei emphasized that the PBOC will maintain a supportive monetary policy, focusing on decreasing corporate financing and household credit costs.

As the PBOC aims to align market interest rates with its main policy rate—the seven-day reverse repo rate—it plans to transition its focus from quantitative targets to price-based tools like interest rates. However, challenges remain due to liquidity risks and uncooperative market conditions, complicating the shift away from state-directed bank lending.