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RPT UPDATE 3 – As the trade war looms, China lowers the reserve requirements of some banks to boost lending

(Repeated history published late Sunday, no change to the text)

* The third RRR was shortened this year by the PBOC with effect from 5 July

Comes over concerns about liquidity, US trade series

* Reductions of 500 billion yuan for larger lenders to release

* Also release 200 billion yuan for small, medium-sized banks

By Kevin Yao and Shu Zhang

BEIJING, March 7 / PRNewswire / – China's central bank said it needed to cut the cash amount some banks need to reserve by 50bp, releasing $ 108bn of liquidity to accelerate the pace of debt equity Swaps and spur loans to smaller companies.

The Reserve Reserve, the third of the central bank this year, was widely feared by investors because of concerns over market liquidity and the potential economic burden of a trade dispute with the United States.

But the $ 700 billion ($ 107.65 billion) in liquidity that the Reserve Bank would use to reduce its reserves was larger than expected.

Expectations of a reduction had risen after the State Council said on Wednesday that monetary policy instruments, including a targeted reduction in bank reserve requirements, will be used to boost lending to small businesses and keep economic growth at a reasonable level.

Economists do not rule out further reduction of the reserve requirement for the remainder of the year as credit costs rise as Beijing drastically reduces leverage in the financial system, a third-year campaign, while uncertainty over Sino-U.S.

The People's Bank of China (PBOC) said on Sunday that the final targeted reduction in reserve retention ratios (RRRs) for some banks – currently 16 percent for large banks and 14 percent for smaller banks – will come into force on 5 July.

The PBOC said the cut will release about 500 billion yuan ($ 77 billion) for the country's five largest state-owned banks and 12 national joint commercial banks. Lenders are encouraged to use the money to carry debt-to-equity swaps.

China's policymakers have been pushing for debt-to-equity swaps since the end of 2016 to reduce pressure on companies struggling with their debts.

The country's top government-controlled banks have rushed to sign contracts with state-owned companies to reduce their debt burden and give them time to change their business and improve their creditworthiness.

The recent RRR cutbacks will also release around 200 billion yuan for mid-sized and small banks to increase lending to small businesses in need of credit, the PBOC said.

The combined cash injection of 700 billion yuan exceeded market expectations of 400 billion yuan. In April PBOC's last targeted RRR cut in April released 400 billion yuan of net liquidity.

"The intensity of the movement exceeded market expectations," said Wang Jun, chief economist in Beijing at Zhongyuan Bank.

"This move will help shore up the real economy and stabilize the financial markets, and we've seen rising credit losses and financing burdens for small businesses, as well as strong capital market adjustment."

But the recent reserve cut signals a "policy fine-tuning," not a policy reversal, Wang said.

The central bank said on Sunday that it would keep monetary policy cautious and neutral.

Sunday's announcement followed the worst weekly loss on China's stock markets since early February, as fears of a comprehensive trade war with the US weighed.

The Chinese yuan also fell to its lowest against the dollar in more than five months on Friday, despite holding firm against a basket of currencies from its trading partners and not seeing a sharp devaluation in sight.

GOODS WAR

The last RRR cut is due to come into force one day before the entry into force of the increased tariffs on the respective lists of goods of the United States and China.

Fears of a full-scale trade war with Washington have fueled concerns about the outlook for the world's second-largest economy, as May's growth data was weaker than expected and Beijing's fiscal stance is disrupting its business.

Overall, net exports already weighed on growth in the first quarter, after giving additional momentum to the Chinese economy last year. This highlights the need for continued strong domestic demand as new US tariffs are introduced.

Beijing is also likely to pull back on reducing its dependency on debt as the dispute escalates into a total trade war, some economists say.

Beijing's financial risk has already begun to drive up borrowing costs, limiting alternative, inscrutable sources of funding for companies such as shadow banking.

Burdensome liquidity conditions have led to an increasing number of loan defaults, with private companies facing increasing refinancing risks. Recent official surveys also showed that tight financings have hit smaller manufacturers.

The weighted average loan rate for non-financial corporations, a key indicator that reflects corporate financing costs, rose 22 basis points to 5.96 per cent in the first quarter, according to PBOC data. In comparison to a total of 47 basis points in 2017.

Policymakers seek to strike a delicate balance between the need for stricter oversight and reform and ensuring the stability of the financial system, while keeping economic growth on track.

ANZ Research said on Sunday it expects another 50 basis point cut in the RRR in October.

Economists still expect China's economic growth to fall from 6.9 percent in 2017 to 6.5 percent this year. Reasons include rising borrowing costs, stricter limits on industrial pollution, and continued action by local governments to curb their debt. ($ 1 = 6.5027 Chinese Yuan Renminbi) (Additional coverage by Norihiko Shirouzu and Ryan Woo cut by Toby Chopra and David Evans)

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