China cuts reserve ratio for small banks

11-Jun-2014 Intellasia | FT | 6:00 AM Print This Post

China has taken a fresh step to boost flagging growth by cutting the amount of cash reserves some lenders must hold at the central bank in a bid to boost lending to small businesses and the rural economy.

The People’s Bank of China said it would reduce the “required reserve ratio” by 0.5 per cent for banks that mainly lend to small businesses and rural borrowers.

In the first quarter of this year, China’s economy grew by an annual 7.4 per cent, down from 7.7 per cent expansion in the final three months of 2013. Even if the country hits its official growth target of 7.5 per cent for 2014, it will be the slowest pace since 1990.

Many economists believe even that target is unrealistic: Morgan Stanley’s Helen Qiao on Monday lowered her growth forecast for this year to just 7 per cent.

The PBoC’s latest move suggests that industrial production, fixed-asset investment and inflation data due out this week are likely to show a further softening in the second quarter. The property market is a further focus of concern, with prices declining month on month in May for the first time since 2012.

Chinese policy makers are attempting to strike a fine balance between preventing a sharp economic slowdown or “hard landing” and reining in credit growth, which risks enlarging the country’s worrying debt burden and fuelling an overheating property market.

In an apparent effort to tamp down expectations of substantial loosening, the PBoC on Friday cautioned that “the basic orientation of monetary policy has not changed” and that liquidity in China’s interbank market is already “suitably ample”.

Mark Williams at Capital Economics said Monday’s move “should not be seen as a move towards broad policy loosening”. “Indeed, this move makes a RRR cut for all banks less likely in the near term,” he wrote in a research note.

The new measure, which comes into effect on June 16, is aimed squarely at small banks. The cut will apply to those for whom either rural or small business loans comprised at least 50 per cent of total new loans last year and for whom such loans comprise at least 30 per cent of total outstanding loans.

Small businesses and farmers have long struggled to obtain sufficient credit from China’s state-owned banks, which prefer lending to large, state-owned industrial companies.

The PBoC said the cut would apply to about two-thirds of city-level commercial banks, which account for 13 per cent of total bank assets, according to official data. In addition, it will apply to 80 to 90 per cent of rural banks and credit cooperatives, accounting for an additional 13 per cent.

The move follows a similar step in late April, when the PBoC cut required reserves for county-level rural credit cooperatives in an attempt to help selected small banks. Today’s loosening, which takes effect on June 16, is larger in scale but will still leave most large and medium-sized lenders unaffected.

Zhang Zhiwei, China economist at Nomura, described the move as “significant”. By his calculations, the new cut will inject about Rmb95bn ($15bn) back into the banking system. When added to other measures, such as the April cut, Beijing will have added Rmb545bn of fresh liquidity into the economy by the end of this month, equivalent to a 50 basis point cut to reserve requirements for all banks.

China’s largest banks are currently required to hold 20 per cent of deposits as reserves at the central bank, while medium-sized lenders must meet ratios of 18 per cent. Rural banks and other small lenders are subject to a rate of 16.5 per cent or less.

There have been some green shoots in the Chinese economy. Credit Suisse analysts recently hailed a “turning point” in growth with many indicators – such as electricity production and shipping container port volumes – showing a clear improvement. Data released over the weekend also suggest that exports are finally picking up as global demand ticks higher, providing further cause for a less pessimistic view.


Category: China

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