In order to ensure customers' withdrawal of deposits and settlement of funds, banking institutions cannot use all deposits for loans or financial investments, but must keep some funds in the central bank, which is the deposit reserve. The ratio of deposit reserve to total deposits is the deposit reserve ratio.
In April 2022, in order to improve the ability of financial institutions to use foreign exchange funds, the People's Bank of China decided to reduce the foreign exchange deposit reserve ratio of financial institutions by 1 percentage point from May 2022, and the foreign exchange deposit reserve ratio was reduced from the current 9% to 8%.
By adjusting the deposit reserve ratio, the central bank can influence the credit expansion ability of financial institutions, thus indirectly regulating the money supply. The excess deposit reserve ratio refers to the ratio of the reserves retained by commercial banks that exceed the statutory deposit reserve to all current deposits. From a morphological point of view, excess reserves can be cash or highly liquid financial assets, such as reserve deposits in central bank accounts.
Since 2006, China's economy has grown rapidly, but the contradictions in economic operation have become more prominent, and the momentum of excessive investment growth has not diminished. One of the main reasons for the rapid growth of investment is the rapid growth of money and credit. Raising the deposit reserve ratio can correspondingly slow down the growth of money and credit and maintain the healthy and coordinated development of the national economy.