China's central bank announced it will free up funds for banks that boost lending to small businesses, in a targeted measure to balance support for the economy without aggravating already high corporate debt.
In a statement Saturday, the People's Bank of China said it would reduce the amount of reserves select banks are required to keep with the central bank by between half and 1 percentage point starting 2018.
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To qualify, banks must meet central bank criteria on lending to small businesses. For instance, banks whose outstanding loans to small firms account for 10% of total loans will receive the largest reduction of one percentage-point in their reserve ratio. Based on its own calculation, the central bank said the cut will apply to all large and medium-size commercial banks and about 90% of the country's city-level commercial banks.
The announcement follows a notice issued this week by the governing State Council, which urged the central bank to help lower financing costs for small and private businesses. In recent weeks, a growing chorus of voices, mostly from Chinese banks and brokerages, has also called on the central bank to act amid signs that tight monetary policy is starting to weigh on growth.
The reserve-requirement ratio varies depending on the size of the bank. At 17% of all deposits for big banks, the ratio is currently among the highest in the world.
In the past year and a half, the central bank has refrained from using this traditional monetary policy tool out of concern that more lending could weaken the yuan, causing capital flight, and undermine the government's campaign to reduce corporate debt and other financial risks. Instead, the central bank has used short-term fund injections into the financial system to ensure adequate liquidity.
Now, the Chinese currency has largely stabilized, and while some economic indicators have pointed to a slowdown, others point to continued resilience in the economy. Those factors, many economists and analysts have said, give the central bank a window of opportunity to act.
But the central bank also must keep an eye on debt levels. As a result, many economists don't expect the central bank to conduct an across-the-board cut in reserve-requirement ratios soon.
Saturday's targeted-easing policy doesn't change the overall tone of China's monetary policy, the central bank said, adding that it will continue to adopt a "prudent and neutral" monetary stance.
It is unclear how much additional money the PBOC will free up as a result of this move, analysts say. By opting for selective easing, China economist Larry Hu at Macquarie Securities said, "the central bank doesn't want to send strong easing signals that would run against the government's financial deleveraging effort."
Write to Lingling Wei at email@example.com
(END) Dow Jones Newswires
September 30, 2017 06:55 ET (10:55 GMT)