China cuts reserve ratio to boost small business loans

World
Europe

‍China has taken a step towards boosting lending to small and micro-sized businesses, startups and rural borrowers by cutting the amount of cash reserves some lenders must hold at the central bank.

The People’s Bank of China (PBOC) said in a statement on Saturday that it would reduce the required reserve ratio (RRR) by 0.5 percent to 1 percent from the benchmark rate for banks that mainly lend to small businesses and the agricultural sector.

The announcement came on the heels of a notice issued this Wednesday by the State Council which said the government would take a number of measures, including tax exemptions and targeted RRR cuts, to encourage banks to support small businesses.

This move marks the first time that the central bank has used this monetary policy tool since February 2016, suggesting that Chinese policy makers are attempting to strike a fine balance between preventing an economic slowdown and a weakened currency, causing capital flight, and reining in credit growth, which risks enlarging the country’s worrying debt burden and fueling an overheating property market.

VCG Photo

Now seems to be a window of opportunity for the regulator to act since the currency has largely stabilized, and the economy has shown signs of continued resilience.

The targeted cut, which comes into effect in 2018, will apply to banks that meet certain criteria on lending to small businesses.

Banks whose outstanding rural or small business loans comprised at least 10 percent of total new loans last year will receive the largest reduction of 1 percent in their reserve ratio, and those whose such loans comprised at least 1.5 percent of total outstanding loans will receive a RRR reduction of 0.5 percent.

By this calculation, as the PBOC pointed out, the new measure will cover all large- and medium-sized commercial banks, around 90 percent of the country’s city-level commercial banks, and about 95 percent of non-county-level rural commercial banks.

Currently, the RRR varies on the size of the bank, and the ratio for large banks stands at 17 percent of total deports, the highest level in the world.

VCG Photo

In an apparent effort to tamp down expectations of substantial loosening, the central bank cautioned that “the basic orientation of monetary policy has not changed” and that it would continue to implement “prudent and neutral” policy to guide reasonable credit and financing growth.

“This cut is different from others, as the central bank allows a three-month lag for the new measure to take effect,” said Zhou Hao, chief economist at Commerzbank, “it means the central bank will not adjust the RRR if there is no severe financial risk event in the short run while the market has to run its course facing tight monetary supply.”

4km