Ratio cut seen aiding small biz, real economy

Last week’s announcement of 50 basis points cut in China’s reserve requirement ratio for eligible financial institutions is likely to further boost lending to the real economy, smaller businesses in particular, and stoke growth in the second half of this year, experts said.

Their comments over the weekend were a response to Friday’s RRR cut by the People’s Bank of China, the central bank, effective Thursday onward.

The cut will likely release 1 trillion yuan ($154.43 billion) in long-term funds, the PBOC said.

China’s stock market performed strongly on Monday, the first trading day after the cut announcement.

The benchmark Shanghai Composite index ended 0.67 percent higher at 3,547.84 points, while the smaller Shenzhen index rose 1.93 percent, and the startup board ChiNext Composite index closed 3.68 percent higher.

The RRR cut was expected as the executive meeting of the State Council, China’s Cabinet, said early last week the authorities concerned would use such cuts in a timely way to aid smaller businesses that have been facing the pressure of rising commodity costs.

Yet, it appears, the 50 basis points RRR cut by the central bank took certain sections of the markets by surprise.

One important consideration for the RRR cut this time is to give targeted help to smaller businesses, said Li Qilin, chief economist at Shanghai-listed Hongta Securities, as smaller firms have been bearing the brunt of the recent commodity price surge.

“Commodity prices have been rising for quite a few months and cost pressures are feeding through midstream and downstream businesses, among which many are smaller firms,” he said in a note.

Some market mavens said the move is an important policy response to a possible economic growth moderation in the second half.

Zhong Zhengsheng, chief economist at Ping An Securities, said on Monday that overall, the Chinese economy is not facing any notable downward pressure. Yet the pent-up demand, relatively slow consumption growth and weak investment in manufacturing are currently the weak links that need structural policy changes to underpin their recovery.

Wang Yiming, a member of the PBOC’s monetary policy committee, said on Monday that the move will help optimize fund structures within financial institutions, better serve the real economy and promote cost-cuts in favor of the real economy.

It will help create a monetary environment that suits high-quality development and help keep prices stable, he said.

He also said that in recent years, the amount of liquidity flowing into the real economy has notably expanded, and financial institutions are in need of long-term funding.

“The latest RRR cut will help unleash certain long-term liquidity to financial institutions, which will then be able to allocate such funding resources according to the needs of more businesses,” Wang said.

Peng Wensheng, chief economist with investment bank China International Capital Corp Ltd, said the cut is a positive response to the trend that appears to suggest the economic growth may moderate in the second half.

“The RRR cut signals that macro policy is maneuvering while overall policy stance remains unchanged,” he said. “Such maneuvers serve to ensure that overall demand stays at a certain level.”