A Chinese national flag flies above the People’s Bank of China (PBOC) headquarters in Beijing, China (Photographer: Qilai Shen/Bloomberg)

China Ramps Up Credit Aid to Small Firms as Trade Tensions Rise

(Bloomberg) -- China decided to cut the amount of cash some banks must hold as reserves, and timed its announcement of the decision to help shore up domestic markets as uncertainties in the trade talks with the U.S. re-emerged.

The required reserve ratio for rural commercial lenders serving companies in the county where the bank operates or with less than 10 billion yuan ($1.5 billion) of assets will be lowered to 8 percent, taking effect on May 15, the People’s Bank of China said on its website early Monday.

The unusual timing of the announcement, as markets were opening, appeared to be in response to an escalation of the trade war by U.S. President Donald Trump. If trade tensions do resurface, China’s monetary policy will “likely turn dovish again” in support of the domestic economy, economists led by Song Yu at Beijing Gao Hua Securities Co. wrote in a note Monday.

The cut will release 280 billion yuan of long-term liquidity, with about 1,000 county-level rural commercial banks qualified for the reduction, and all the newly released funding will be used in loans to private and small companies, the central bank said.

The announcement had “special timing” also because the PBOC has not cut the reserve ratio in May since 2012, a month usually with less liquidity pressure, Ming Ming, head of fixed-income research at Citic Securities Co Ltd, wrote in a report. "The unexpected targeted RRR cut is likely made to ease market volatility," he said.

Trump threatened in a tweet to raise tariffs in the U.S.-China dispute as soon as this week, overturning recent signs that a deal was almost done. China’s benchmark Shanghai Composite Index closed down 5.6 percent, and both offshore and onshore yuan were weaker.

The announcement comes after the State Council last month called for changes to allow medium and small-sized banks to set aside less money in reserves. The decision continues the targeted easing approach which policy makers have addressed the slowdown in the economy since last year -- attempting to provide credit to needy sectors without flooding the market with cash.

While the PBOC has come out twice in April to deny rumored reserve ratio cuts, the bank’s newspaper Financial News published an article early Monday to argue there is still room for more, signaling a policy tweak.

“There are unsolved issues in the trade talks and the U.S. economy is doing better than expected,” said Nie Wen, an economist at Huabao Trust in Shanghai. “Hence there is a possibility for further escalation of conflicts if the two sides can’t forge a deal in a short term, and more easing including a universal RRR cut and even an interest rate cut are both possible."

What Bloomberg’s Economists Say

“There is still a need for broad-based stimulus. In particular, we continue to expect at least one more cut in the RRR in 2Q or early 3Q. It’s possible the timing of the targeted RRR cut is aimed at offsetting bad news from trade talks. If so, it’s likely too insufficient for the task."
-- Chang Shu, chief Asia Economist for Bloomberg Economics in Hong Kong.
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