The People’s Bank of China had used reserve ratio cuts in past years to spur broader economic growth. This time appears to be different.
The central bank said it would cut the ratio only for banks that meet minimums for lending to small businesses or other borrowers that it called “inclusive finance.” The new category encompasses loans typically of less than 5 million yuan, or about $750,000, that are issued to small businesses, small family companies, farmers, students and poverty alleviation programs.
Zhu Ning, a prominent economist at Tsinghua University, said that the central bank was trying to ease credit for the smallest-scale borrowers without setting off more wasteful lending.
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The move on Saturday, he said, “kills two birds with one stone, by providing liquidity to small enterprises while also providing a subtle sign of loosening.”
Reserve ratios are currently 15 to 17 percent of a bank’s assets, depending on the bank’s size. The central bank said that it would reduce the reserve ratio by half a percentage point for banks that have at least 1.5 percent of their loans in inclusive finance. It also said that it would lower the ratio by 1.5 percentage points for banks with at least 10 percent of their loans in inclusive finance — a threshold that practically no banks meet in China except for a few small, mainly rural financial institutions, experts said.
In another move that makes the announcement this weekend different from past moves on reserve requirements meant to spur growth, the central bank said the rules would not take effect until the beginning of next year. In the past, such changes took effect immediately or within a few days. Delaying the start of the rule this time gives banks time to increase their lending to small businesses so they can qualify for the new reserve ratios.
Gary Liu, the president of the China Financial Reform Institute, a research group in Shanghai, said that the timing of the central bank’s action on Saturday, the day before China’s National Day holiday on Sunday and before a week when most of the country will be on vacation, suggested that the central bank was trying to show that it was following a broad Communist Party mandate to regulatory agencies to keep the financial sector stable ahead of an important political meeting.
The Chinese Communist Party will hold its twice-a-decade congress beginning on Oct. 18, an event that is expected to confirm President Xi Jinping as the party’s general secretary for another five years while also shaking up the rest of the party’s top leadership.
Reserve ratio cuts were once one of the People’s Bank of China’s most potent moves to stimulate the economy. But since the last reduction in the reserve ratio, early last year, officials have turned to subtler and more precise tools, like transactions in China’s increasingly sophisticated credit markets, that allow them to guide the economy in more directed ways.
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Article source: https://www.nytimes.com/2017/09/30/business/china-tries-to-steer-loans-to-small-businesses.html?partner=rss&emc=rss
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