Caixin
Mar 12, 2020 07:47 AM
FINANCE

China’s Cabinet Signals Further Bank Reserve Cut to Bolster Economy

Photo: VCG
Photo: VCG
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Top Chinese officials signaled a further cut in the amount of cash some lenders must hold in reserve as a way of pouring more liquidity into the banking system to bolster an economy hammered by the months-long coronavirus epidemic.

The State Council, China’s cabinet, called for targeted easing measures and cuts in bank reserve requirement ratios (RRR) to shore up lending to small and micro businesses and reduce financing costs. Policymakers want to help companies resume operation following disruptions caused by Covid-19, according to a statement issued after a Wednesday meeting chaired by Premier Li Keqiang.

The statement fueled expectations that the central bank will follow the cabinet’s call to cut RRRs in the next few days.

For the first time, the cabinet also urged lower RRRs for joint-stock banks, a move that would encourage lending to smaller enterprises by easing joint-stock banks’ debt concerns, said Wang Yifeng, chief banking analyst at Everbright Securities.

Joint-stock banks are under greater liquidity pressures as they are subject to higher RRRs than most city commercial banks and rural lenders. Under current rules, joint-stock banks are required to set aside 9% to 10.5% of their funds as reserves, lower only than for large state-owned banks.

Reserve requirements for foreign-funded banks and some large city commercial banks are equivalent to those of joint-stock banks, while the requirements for small regional and rural lenders range between 6% and 9.5%.

Most joint-stock banks have sound asset conditions, but higher reserve requirements often constrain their willingness to lend, said Lu Zhengwei, chief economist at Industrial Securities.

Joint-stock banks mainly serve small and medium-sized enterprises and often have greater diversity in services and products, said Wen Bin, chief researcher at Minsheng Bank. A RRR cut for joint-stock banks will allow them to play a greater role in supporting smaller businesses, Wen said.

China is stepping up efforts to resume business nationwide as the Covid-19 outbreak shows signs of subduing inside the country. Most less-affected provinces and cities have largely resumed production over the past few weeks while business activities in Hubei, the epicenter, also move toward recovery.

However, outside China the novel coronavirus is spreading at a faster pace, forcing the World Health Organization Wednesday to declare a pandemic. A number of governments, including those of the U.K., Canada, Australia and Japan, rolled out stimulus measures to counter the economic fallout.

Since the outbreak escalated in late January, Chinese authorities have taken a series of steps including key lending rate cuts and liquidity injections to bolster the economy as measures to contain the virus curtailed business activities nationwide. Some businesses plunged into liquidity crises, and some even risk bankruptcy if work stoppages continue, according to multiple surveys.

In February, China’s manufacturing activity contracted at the fastest pace in nearly 16 years with record declines in new orders, output and employment.

Overall credit growth also slumped in February as the outbreak further dampened demand in what is traditionally a slow month for lending because of the Chinese New Year holidays. Chinese banks extended 905.7 billion yuan ($130.24 billion) of new yuan loans in February, down from a record 3.34 trillion yuan in January, according to central bank data released Wednesday.

Aggregate financing increased 855.4 billion yuan in the month, compared with 967 billion yuan a year ago.

At its Wednesday meeting, the cabinet also called for efforts to stabilize foreign trade and investment with measures including higher tax rebates and wider market access to foreign investors. China will encourage financial institutions to boost credit for the foreign trade sector and step up lending support for key companies vital to supply chains, the cabinet said.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com)


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