China's central bank sees room to cut reserve buffers to boost growth

China still has room to lower the amount of cash banks must hold as reserves while it faces some constraints in cutting interest rates, a central bank official said on Thursday, as it seeks to bolster the country's flagging economic recovery.

The People's Bank of China, which has steadily reduced interest rates and injected liquidity this year, is under pressure to do more to ensure the economy grows around 5% this year, in line with the government's target.

The average reserve requirement ratio, or RRR, for financial institutions is around 7% at present, "so there is some room," Zou Lan, head of the bank's monetary policy department, said at a media briefing.

The central bank would watch developing economic trends before making any adjustments, Zhou said, adding that the bank was closely monitoring policy changes in major economies.

China's central bank has cut the weighted average RRR from nearly 15% in 2018 to the current level, pumping more than 12 trillion yuan into the economy.

It made a 50-bps RRR cut for all banks that took effect on Feb. 5 but indicators showed China's economy grew much slower than expected in the second quarter, dragged by a protracted property downturn and weak domestic demand.

The PBOC would guide market interest rates closer to its main policy rate - the seven-day reverse repo rate - as it shifts its focus from quantitative targets to price-based tools such as interest rates, Zou added. The central bank wants to shift its policy framework to target the cost of credit rather than its size, but liquidity risks and uncooperative markets are making it difficult to transition the economy away from state-directed bank lending.