The central bank’s flagship news publication is emphasising the significance of its recent reserve ratio cut as a means of raising China’s level of financial inclusion, as opposed to a liquidity expansion and stimulus measure.
At the end of September the People’s Bank of China announced conditional cuts to the reserve ratio requirement for Chinese commercial banks, contingent upon the percentage of lending to borrowers targeted by financial inclusion policies.
Commercial banks whose financial inclusion lending percentage is at least 1.5% will enjoy a reserve requirement reduction of 0.5 percentage points starting from 2018, while those whose financial inclusion lending percentage is at least 10% will enjoy a reserve requirement ratio reduction of 1.5 percentage points.
In an article entitled “Fully Exploiting the Special Role of the Directed Reserve Rate Cut Policy” (充分发挥定向降准政策的“特别作用) published by the People’s Bank of China’s Financial News, Zhuo Shangjin (卓尚进) writes that that the goal of the policy is to spur financial inclusion and the ability of the Chinese finance sector to service neglected segments of the real economy.
“The directed reserve ratio reduction policy just released by the central bank is a ‘special policy,’ as indicated by the policy’s special support for the development of financial inclusion and its bespoke formulation,” wrote Zhuo. “The very title of the central bank directive is ‘The People’s Bank of China Notice on Implementing Direct Reserve Rate Reductions to Implement Financial Inclusion’ (中国人民银行关于对普惠金融实施定向降准的通知).”
While many market observers believe that the cut is actually a stimulus measure intended to expand liquidity in China’s banking system, running contrary to PBOC’s ongoing deleveraging drive and “stable, neutral” monetary stance, Zhuo claims that the policy is specifically designed to channel funds to those parts of the economy still poorly serviced by the financial system.
“Industry observes all know that reducing the deposit reserve ratio is a key tool of the central bank for releasing monetary liquidity, and can directly increase the funds of banking institutions, expanding loans to various market entities,” writes Zhuo. “For this reason, it’s often compared by people to a ‘potent drug’ for stimulating economic development.
“However, this time the central bank is adopting a directed reserve ratio reduction policy, which is only targeting financial inclusion areas.
“It focuses for example on single loans of under 5 million yuan for micro-enterprises, individual commercial and industrial customers and main business loans for micro-enterprises, as well as loan for venture guarantees, setting up documentation and identification for disadvantaged groups, and study assistance loans.”
According to Zhuo PBOC remains heavily focused on preventing systemic financial risk and ensuring that China’s financial system better serves the country’s real economy.
“Finance is the lifeblood of the real economy, and servicing the real economy is the native role of finance, as well as the fundamental means of preventing financial risk.
“This direct reserve ratio reduction policy,…will be of benefit to the development of innovative financial inclusion by banking institutions, as well as of benefit to adjustments to the economic structure and the sustainable, healthy development of the real economy, thus achieving positive reciprocal development of both the financial sector and the real economy.”
Zhuo said that PBOC remains committed to its neutral monetary policy while also seeking to drive financial inclusion.
“Over the past several years the central bank has continually explored and improved the framework, mechanisms, tools, adaptability and diverse functionality of monetary policy.
“Everyone knows that monetary policy is a macro-adjustment policy for controlling aggregate demand, and under the prerequisite that stable, neutral monetary policy doesn’t change, the central bank will expand the significance and reach of financial inclusion by establishing advance incentive mechanisms for lending and investment in financial inclusion areas and implementing directed reserve ratio reduction policies.
“This will expedite the direction of financial resources towards financial inclusion areas, and optimise the credit and lending structure.”
David Millhouse, Head of China Research, Forsyth Barr Asia, has argued that the reserve ratio reduction will help to boost China’s economic performance should it prove effective at channelling a greater volume of funds towards more efficient small and medium-sized enterprises in the private sector, as opposed to lumbering state-owned enterprises.
Liang Hong, the chief economist of China International Capital Corporation, has pointed out however that PBOC has set the financial inclusion lending threshold at a very low level, which means that the vast majority of commercial banks will qualify and as much a 1 trillion yuan in additional liquidity could be released.