China's central bank governor said Monday that cuts in banks' reserve requirement ratio (RRR) were not to boost capital market confidence or improve property market liquidity.
Funds released from RRR cuts will flow to different sectors of the national economy in accordance with loan distributions. "There will not be a typical direction," said Zhou Xiaochuan, governor of the People's Bank of China (PBOC).
RRR adjustments do not necessarily reflect monetary policy conditions, but, instead, are adopted to hedge against changes in the country's foreign reserves, Zhou said at a press conference on the sidelines of the country's annual parliamentary session.
The central bank has cut the RRR twice in three months to 20.5 percent for large commercial banks and 17 percent for mid- and small-sized banks, after hiking the RRR six times last year in an effort to check inflation.
The latest cut in February lowered the RRR by 50 basis points and released an estimated 400 billion yuan (63.54 billion U.S. dollars) in capital into the market.
"Theoretically speaking, there is much room for RRR cuts," Zhou said, but he noted that the adjustment of the RRR will depend on market liquidity conditions, which are connected to China's yuan funds outstanding for foreign exchange and the balance of international payments.
China's central bank has also used quite a few monetary policy price tools, according to Zhou. The PBOC has hiked interest rates five times since October 2010.
"But there are restraints, and we are paying particular attention to the possible impact on capital flows, especially in a time of economic globalization," he said.