Beijing Hopes to Channel over 1 Trillion Yuan in Funds towards China’s Real Economy

A slew of measures recently launched by the Chinese central government are expected to channel in excess of 1 trillion yuan in funds towards the real economy.

The “People’s Bank of China Notice Concerning Reducing the Renminbi Required Reserve Ratio for County Rural Village Commercial Banks” (中国人民银行关于下调服务县域的农村商业银行人民币存款准备金率的通知) released on 21 May outlines three sets of reserve ratio cuts on 15 May, 17 June and 15 July.

The move is expected to benefit around 1000 rural village commercial banks that provide their services to county-level administrative entities, and unleash 280 billion yuan in long term funds which will be used for lending to private enterprises and micro and small enterprises.

“This policy is directed, and equal to a targeted required reserve ratio cut,” said Zhao Xijun (赵锡军), vice-head of the School of Economics and Finance at Renmin University to state-owned media. “[It] will markedly increase the strength of funds for servicing county-area small and medium-sized banks; expedite a reduction in funding costs, and raise the proactiveness of support for the growth of privately run and micro and small enterprises.”

In combination with a slew of other measures the new policy is expected to bring the volume of funds channelled towards China’s real economy to over 1 trillion yuan.

These include two targeted medium-term lending facilities (MLF) operations which will release funds of 257.5 billion yuan and 267.4 billion yuan respectively, as well as targeted required reserve ratio cuts for shoring up financial inclusion, expected unleash long-term funds of around 250 billion yuan.

“In the next stage, the People’s Bank of China and the China Banking and Insurance Regulatory Commission will work with other relevant departments to adopt vigorous measures, exploit the collective strength of policies by all departments, and jointly expedite reductions to the financing costs of micro and small enterprises,” said central bank vice-governor Liu Guoqiang (刘国强).

Zhao Xijun said that since the start of the year Beijing has maintained appropriately stable monetary policy, as well as focused on structural optimisation and targeted “irrigation” with the release of over 1 trillion yuan in funds, which will serve to stabilise market expectations and confidence.

The Chinese central bank’s first quarter Chinese monetary policy execution report points to new financial inclusion micro and small loans of 552.9 billion yuan for the first three months of 2019, for an increase of 290 billion yuan compared to the same period last year.

The financial inclusion micro and small loan balance at the end of March was 19.1% ahead of the reading for the same period last year, for YoY acceleration of 3.9 percentage points, and a gap of 5.4 percentage points ahead of growth in total lending.

Zhao Xijun said that that banks should make haste to establish profit transfer mechanisms that benefit micro and small-enterprises, in order to more effectively reduce their financing costs.

“From the point of view of monetary policy, stable monetary policy requires appropriately timed counter-cyclical adjustments, timely advance micro-adjustments made in accordance with changes to circumstances, the flexible use of monetary policy tools including targeted reserve ratio cuts, targeted medium-term lending facilities, re-lending and re-discounting; and innovation in monetary policy tools and mechanisms,” he said.

“At the same time monetary policy and other policies must strengthen coordination and combination, in order to exploit their collective strength.”

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