China has given temporary relief to five of its major banks as authorities announced a cut in their required cash reserve ratio. The lower ratio will allow the banks to employ more of their resources as they are not required to keep a high cash reserve.

The People's Bank of China announced that it had shaved the reserve requirement ratio by one percentage point. The required ratio to be retained by the bank is now 16 percent. The step was taken to improve money supply during the Lunar New Year holiday period.

Like Us on Facebook

It is expected that the central bank will revert the ratio to the normal level after the holiday period. "This is a temporary adjustment, and is mainly in response to the cash withdrawal, tax payment, and reserve payment," a source told Reuters.

The People's Bank of China also said that the new lending arrangement would involve nearly 2.55 percent cost, which is in line with the open market operations. In this regard, the latest measure is somewhat different from traditional cuts in reserve ratio.

According to Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing, commercial banks in China are believed to have $1.6 trillion worth of sovereign and financial bonds outstanding as of December. However, the central bank did not say anything about the requirement or collaterals for temporary funding.

The five banks covered under the scheme are the Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Bank of China, Bank of Communications Co., and the Agricultural Bank of China.

TagsThe People's Bank of China, Industrial and Commercial Bank of China Ltd, Bank of Communications Co