This Aug 7, 2011 picture shows the headquarters of the People's Bank of China (PBOC), China's central bank, in Beijing. (MARK RALSTON / AFP)
The recent decision by the People's Bank of China (PBOC) to cut banks’ reserve requirement ratio (RRR) serves as a “stick and carrot” approach for lenders to navigate the country’s liquidity from speculative investment to real economy, says global financial services group Credit Suisse.
The central bank said on Sept 30 that a planned RRR reduction, for banks reach the requirements for lending to small firms, startups and rural borrowers to be implemented next year, qualified banks will see the rate cut from between 50 and 150 basis points.
“The market has been expecting the central bank to add more liquidity into the system, but the selective easing signals that the PBOC has no intention to add more liquidity. It will give directional incentives for banks to support the real economy,” said Tao Dong, senior adviser of private banking for Asia at Credit Suisse in Hong Kong.
It will give directional incentives for banks to support the real economy
Tao Dong, senior adviser of private banking for Asia at Credit Suisse in Hong Kong
The PBOC said the vast majority of China’s banks would be eligible for at least a 50-basis-point cut.
Banks, whose loans to the targeted group amount to 1.5 percent of the outstanding loan balance or newly added loans for the previous year, will enjoy a rate cut of 0.5 percent, as stipulated by the new policy.
For banks meeting the 10-percent requirement, the cut rate will be expanded to 1.5 percent. Market experts believe that most of the banks will see a 50-basis-point cut, while only a handful might reach the requirement of further cuts. An estimated 700 billion yuan (US$105 billion) in liquidity is expected to be released.
Tao said the selective easing bypasses all the non-financial institutions which have been the most aggressive lenders to speculative assets and have been mainly responsible for the skyrocketing housing prices on the mainland.
He believes the innovative measure is a strong signal for a healthier credit structure.
Tao sees a “turning point” in the mainland’s credit cycle, citing the fifth National Financial Work Conference held in Beijing in July this year when the word “risk” was mentioned 31 times in discussion notes, while “regulation” was mentioned 28 times.
He said the recent rate cut, which releases more liquidity but designated to small firms and the agriculture sector, is optimizing the country’s credit structure. The new credit cycle will eventually force property prices into a correction.
“In the past few years, the government has been attending to deleveraging several times, but whenever the GDP slowed down, the PBOC will give in. This time is different, President Xi Jinping is far more keen about long-term sustainability even at the expense of short-term pain,” Tao said.