China bank push should go further

China’s central bank last week reduced the amount of money banks had to keep on their balance sheets rather than lend, in a further effort to stimulate the flagging economy.

The People’s Bank of China (PBOC) cut the required reserve ratio (RRR) for mainly rural and small banks by 50 basis points. The aim is to help stimulate lending to small firms, which the bank called “weak links” needing targeted support.

The cut mainly affects banks not included in an earlier widespread cut in the RRR in late-April. However, Capital Economics said that “even taking the two [cuts] together, these steps don’t amount to much”.

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Mark Williams, chief Asia economist, and Qinwei Wang, China economist, said the cuts “should not be seen as broad policy loosening” but demonstrate the reluctance from China to loosen monetary policy.

While various banks currently having different RRRs, the average is just below 20 per cent, and so a 50 basis point cut is unlikely to have a big impact.

But Mr Williams said the Chinese authorities were hesitant to implement broad stimulus measures due to concerns that it could lead to “over-investment” and problems with credit.

Instead, China is undertaking “increasingly creative” moves, such as this targeted RRR cut, to keep growth strong, while avoiding problems caused by its huge stimulus measures following the financial crisis.

But Mr Williams warned: “There is a good chance downward pressures from the property sector will intensify later in the year, prompting RRR cuts for all banks.”