The share of deposits banks must park at the PBOC, set separately for large and small-medium institutions. An RRR cut is the PBOC's most direct way to release long-term, zero-cost liquidity — effectively a permanent injection, complementing the short-term fine-tuning done through 7-day reverse repos.
The Reserve Requirement Ratio (存款准备金率) is the share of deposits that banks must hold as reserves with the PBOC. It is one of the PBOC's primary monetary policy instruments.
Why it matters: RRR cuts release liquidity into the banking system, enabling more lending. The PBOC differentiates between large and small institutions, with small banks enjoying a lower requirement. Each 50bps cut typically releases approximately 1 trillion yuan of long-term liquidity. A cut works on two levels: substitution — replacing costly funding banks borrow via the MLF with zero-cost reserves, which repairs net interest margins and creates room for LPR cuts — and signaling, since RRR moves usually land as part of a broader stabilization package. Note the constraint: the weighted-average ratio has fallen to a record low around 6%, and the lowest tier of institutions already sits at 5% — widely read by the market as the de facto floor — so the room for conventional cuts is finite, part of the backdrop to the PBOC restarting outright government bond trading in 2024 and building out newer liquidity tools.