China central bank targets rural sector

June 10, 2014 - 12:00:00 am

BEIJING: China’s central bank said it will cut the level of reserves banks must hold for those that have sizeable loans to the farming sector and small- and medium-sized firms, a move the government had flagged in May to support the economy.

The People’s Bank of China (PBOC) said the targeted 50-basis-point reduction in the reserve requirement ratio (RRR), effective from June 16, would also apply to financial firms that disburse consumer or auto loans.

The announcement puts into action a promise by the cabinet to lower the RRR for more banks on May 30. The move underscores the government’s intent to selectively relax policy in sections of the real economy deemed most in need of assistance, areas the PBOC described as “weak links” in its statement yesterday.

The nuanced approach is to avoid increasing credit supply for all businesses, which critics fear would stoke speculation or wasteful investment in the world’s second-biggest economy.

“The selective easing is meant to be a ‘smart bomb’ to deliver liquidity to specific areas in the real economy, yet without changing the basic tune of the monetary policy stance,” Credit Suisse said in a note to clients.

This is the second time since April that China’s central bank has acted on the instructions of senior Chinese leaders to lower the RRR for some banks.

The last time it cut the RRR was on April 25, a reduction of between 50-200 basis points that applied only to rural banks.

In a sign that authorities do not want any one bank to enjoy too big a cut in its RRR, the central bank said that banks which already had their reserve requirements relaxed on April 25 would not be eligible for yesterday’s reduction.

“This targeted reduction is to encourage commercial banks to allocate more funds to areas that need support in the real economy,” the central bank said on its website, adding that it wishes to see a smooth transmission of monetary policy.

It said the “basic” direction of China’s monetary policy has not changed, and that liquidity supply in the country’s banking system is ample and will be kept at an appropriate level.

Banks’ reserve requirements are neither uniform or transparent in China, and the central bank did not say where ratios stand after the latest change. Smaller banks tend to have lower ratios than major banks, which had an RRR of 20 percent in 2012.

China’s economy has shown recent signs of stabilising, but investors are speculating that the authorities may announce more stimulus measures, particularly to prevent a sharp deterioration in the property market.

This is even as China allows the yuan to show surprising buoyancy in the past few days.