China moves to give banks room to increase lending

Central bank cuts reserve requirement ratio for first time since February 2016

China’s central bank yesterday cut the amount of cash that some banks must hold as reserves for the first time since February 2016 in a bid to encourage more lending to struggling smaller firms and energise its lacklustre private sector.

The People’s Bank of China (PBOC) said on its website that it would cut the reserve requirement ratio (RRR) for some banks that meet certain requirements for lending to small business and the agricultural sector.

The PBOC said the move was made to support the development of “inclusive” financial services and will be available to all medium and large-sized banks that meet requirements starting in 2018.

The reserve requirement rate will be cut a further 50 bps (basis points) — or 0.5 per cent — for banks whose loans to the targeted groups account for 1.5 per cent of their balance of outstanding newly added loans for the previous year.

The rate will be cut a further 100 bps for banks whose loans to the designated groups account for 10 per cent of all loans, the PBOC said.

China’s cabinet had recently flagged a possible move, saying the government will take a number of measures, including tax exemptions and targeted reserve requirement ratio cuts to encourage banks to support small businesses.

The PBOC said the move was made to support lending of under five million yuan to small firms, loans to individual proprietors and for agricultural production, and lending that supports innovation, the poor and education.

The move is in line with existing policy to encourage more targeted lending to more vulnerable sectors of the economy, even as the government takes steps including reducing speculative investment in the financial sector.