(Yicai Global) Dec. 7 -- China's upcoming reserve requirement ratio decrease is to underpin the macro economy and protect the fundamentals of small and medium companies, and will not change the country’s prudent monetary policy, Yicai Global learned from interviews with a number of experts.

The ratio of banks' reservable liabilities will be narrowed by 0.5 percentage points on Dec. 15, the People's Bank of China said yesterday. After the reduction, the weighted average RRR for financial institutions will stand at 8.4 percent. The move is expected to release CNY1.2 trillion (USD53 billion) in long-term funds to support the development of the real economy.

This is not a deviation from the country’s prudent monetary policy, Zhou Maohua, macro-researcher at China Everbright Bank’s financial market department, told Yicai Global. The RRR cut provides financial institutions with long-term and low-cost funds. This can help reduce financing costs so as to benefit the real economy and stimulate the vitality of micro entities.

The RRC cut will reduce capital-related costs at financial institutions by about CNY15 billion (USD2.4 billion) per year, the PBOC said. This will help reduce society’s comprehensive financing costs and strengthen support for the real economy, especially the micro, small and medium firms.

China’s economy will still face some downward pressure in the first half next year, said Wen Bin, chief researcher at China Minsheng Bank. The operation of companies, especially small and medium-sized ones, will be relatively difficult.

The RRR cut can encourage the allocation of credit and it can also guide financial institutions to strengthen support for key areas and weak sections of the macroeconomy, so as to ensure the economy can operate within a reasonable range next year, Wen said.

The need to stimulate aggregated demand by relaxing interest rates is rising, said Wang Yifeng, chief banking analyst at Everbright Securities. Therefore it cannot be ruled that this month’s Loan Prime Rate, which is the benchmark rate for loans, could be cut by five basis points.

China’s macroeconomy may require monetary policy to stay stable, with no need for substantial easing next year, said Lian Ping, chief economist at Zhixin Investment and dean of Zhixin Investment’s research institute.

Editors: Tang Shihua, Kim Taylor