China Signals Reserve Ratio Cut Coming to Help Small Firms

(Bloomberg) -- China will use monetary policy tools, including cutting reserve requirements for some banks, to boost credit supply to smaller companies, according to a cabinet decision.

The country will ensure the economy is operating in a reasonable range, and keep liquidity "appropriate and sufficient", according to a official report on the cabinet meeting which was chaired by Premier Li Keqiang. The state will also boost market confidence via policy coordination, the report said.

The PBOC last lowered reserve ratios for most big banks in April by 1 percentage point. Analysts have anticipated the central bank would conduct more RRR cuts this year, citing slowing credit growth.

"Over the past couple of months the PBOC has been under increasing pressure as credit supply has tightened, growth slowed, credit defaults have been rising, and Sino-U.S. trade conflicts have been escalating," Lu Ting, chief China economist at Nomura International Ltd in Hong Kong, wrote in a note. "We believe the imminent ‘targeted’ RRR cut could cover most banks, so effectively it is likely to be just like a universal RRR cut."

Deteriorating relations between the U.S. and China prompted a stock market sell-off on Tuesday, and although Chinese stocks rose slightly on Wednesday, concerns about the trade dispute and the already slowing economy prompted the authorities to repeatedly attempt to influence markets.

On Tuesday, People’s Bank of China Governor Yi Gang pledged to use monetary policy comprehensively and maintain liquidity at an appropriate and stable level. On Wednesday, officials set the daily fixing of the yuan at a much stronger level than expected, suggesting efforts to stem a two-day slump that was the steepest since the 2015 devaluation.

The state council also announced the following policies to support small businesses:

  • Boost the quota and cut the interest rates of loans the PBOC makes to banks to encourage them to lend money to smaller firms and the agricultural sector
  • Ensure the pace of growth in loans to small companies is faster than overall loan expansion
  • Encourage banks to expand their lending to small and medium-sized companies
  • Forbid financial institutions from charging additional fees on loans to SMEs
  • Loans to SMEs with a credit quota lower than 5 million yuan ($770,000) will become eligible collateral for the medium-term lending facility

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