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China takes another step in trying to stabilize its economy

The People’s Bank of China plans to cut deposits that banks are supposed to hold in reserve in order to add liquidity to the banking system, the Wall Street Journal reports. The bank hopes that this move will encourage an increase in lending.

It would be the third significant reduction to the reserve requirement ratio this year. The PBOC plans to reduce the ratio by about half a percentage point, which would potentially make 678 billion yuan, or about $106.2 billion, available for banks to lend.

The PBOC is considering only targeting banks that lend large amounts to small and private businesses, the ones that likely have more influence on the future growth of China’s economy, a strategy that has not proven to be effective in the past.

By increasing liquidity in this way, the PBOC is essentially admitting that the country’s move to devalue the yuan is backfiring. This plan is expected to go into effect sometime either at the end of this month or early next month.

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