State Media Says Reserve Ratio Cut Now Imminent

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Reports from China’s state-owned media indicate that another cut in the country’s required reserve ratio is imminent, amidst efforts by Beijing shore up financial inclusion for the country’s small and micro-enterprises.

At a meeting held on 20 June China’s State Council indicated that it would employ monetary policy tools including targeted reserve ratio cuts to expand the supply of credit to small and micro-enterprises.

Liao Zhiming (廖志明), chief banking sector analyst with Tianfeng Securities, said to Securities Daily that based on the State Council’s prior remarks he expects the Chinese central bank to implement a third reserve ratio cut within the near-term.

While 900 billion yuan of the 1.3 trillion yuan unleashed by the 100 basis point targeted reserve cut implemented at the end of April was intended to help Chinese banks swap out their medium-lending facilities (MLF), Liao points out that the MLF balance still stood at 4.02 trillion yuan as of the end of May.

Hua Changchun (花长春), chief global analyst with Guotai Junan Securities, points out when the State Council proposed a targeted reserve cut at a meeting held on 27 September 2017, the central bank followed through with implementation just several day subsequently.

Consequently Hua expects another reserve cut to follow very shortly, yet expects it to be smaller than the reduction implemented in April, given that it will focus more on resolving the financing challenges of small and micro-enterprises.

Hua further notes that May saw sharp declines in total social financing, while the real economy has seen a continuous fall in total financial support which has left small and micro-enterprises especially hard hit.

“At present the ability of banks to extend loans is significantly limited by the liability side of their balance sheets,” said Liao Zhiming. “Reducing the reserve ratio will raise the ability of banks to extend loans, and be of benefit to reducing costs for the real economy.”

Li Qilin (李奇霖), chief macro-economist with Lianxun Securities, said the Chinese central bank will still maintain prudent and neutral policy in the wake of a reserve cut.

“Following the central bank’s expansion of the scope of qualified collateral for medium-term lending facilities, we see another targeted reserve cut,” said Li. “However, the State Council meeting emphasised the need to maintain stable and neutral monetary policy, which means that there is no possibility of comprehensive loosening within sight in the short-term.

“Given the balancing of risk prevention and deleveraging, all we’re seeing is the launch of a new cycle of targeted loosening.”

According to Li the goal of any targeted loosening will be to increase the supply of loans to small and micro-enterprises, particularly given that they have been especially hard hit by Beijing’s ongoing deleveraging campaign.

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