The targeted reduction is a ‘structural adjustment’ and isn’t a shift in monetary policy

by BLOOMBERG

BEIJING • China’s central bank said it will reduce the amount of cash lenders must hold as reserves from next year, with the size of the cut linked to the ow of funding to parts of the economy where credit is scarce.

The targeted measures apply to all major banks, 90% of city commercial banks, and 95% of rural commercial lenders, the People’s Bank of China (PBoC) said in a statement on Saturday. Cuts will range from 0.5 percentage point to 1.5 percentage point depending on how much business banks do with small enterprises, agricultural borrowers and startups. Foreign banks will also be eligible for the cut should they meet the requirements.

Banks will enjoy 0.5 percentage point reserve requirement ratio (RRR) cut if eligible lending exceeds 1.5% or more of their new lending in 2017. Deduction will be 1.5 percentage point if eligible lending reaches 10% or more of new lending in 2017, or if “inclusive finance” loans take up 10% of total outstanding loans in 2017. Rural commercial banks who meet an earlier requirement that at least 10% of new lending is local can receive a one percentage point reduction.

The targeted reduction is a “structural adjustment” and isn’t a shift in monetary policy, the central bank said in a separate questions and anwers statement on Saturday. Policymakers, who have kept the benchmark lending rate unchanged for almost two years, also reiterated on Saturday that they aim for “prudent and neutral” monetary policy.

The policy signals that the PBoC is, like the rest of the government apparatus, pulling multiple levers to keep economic growth from slowing too sharply in the second half, when the all-important 19th Party Congress takes place. While China is currently experiencing still-rapid credit growth despite an anti-leverage campaign, small-and medium-sized enterprises can still be starved of credit.

“The latest move is striking for the advance notice it gives the banks, apparently aimed at encouraging lending to SMEs ahead of the year-end so they can clear the threshold for lower reserve requirements,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a report. “It’s important to note that the PBoC has a range of policy instruments it can use to manage liquidity and steer lending.”

The move will free up about 600 billion yuan (RM378 billion) of funding, Ming Ming, head of fixed-income research at Citic Securities Co in Beijing and a former PBoC official, wrote in a note. Lianxun Securities Co analysts led by Li Qilin estimated that the cut will release about 700 billion yuan of liquidity, and called that total a conservative estimate. The RRR for large banks currently stands at 17%.

A targeted cut taking effect in three months means the central bank “doesn’t think there’s a big need to adjust monetary policy,” and that deleveraging remains crucial as the economy hasn’t shown any signs of deterioration, said Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note.

The central bank and the country’s top leaders have consistently used language pledging “prudent and neutral” monetary policy and vowed to control financial risk since President Xi Jinping convened with them at the Central Economic Work Conference in December. The push to prevent risk has intensified ahead of the twice-a-decade Party Congress set for Oct 18. — Bloomberg