PBOC to cut RRR further for targeted banks

China's central bank yesterday said it will further cut the reserve requirement ratio for targeted banks, a move to support small companies and agriculture under the government's mini-stimulus package.

The People's Bank of China said the reserve requirement ratio will be cut 0.5 percentage points for two-thirds of city commercial banks, 80 percent of rural commercial banks above county level and 90 percent of rural cooperative banks above county level, effective from next Monday.

This reduction targets banks which increase loans or allocate a greater proportion of lending to small companies. It is the second cut in two months in the amount of money that banks must set aside with the central bank.

"The reduction in the reserve requirement is to implement the government's recent pro-growth decision and enhance the financial sector's ability in serving economic activity," the PBOC said in a statement.

On May 30, the State Council, China's Cabinet, said additional policy easing measures would be launched, promising to increase "targeted" monetary and credit easing for qualified institutions, cut corporate financial burden, and accelerate policy implementation.

Wang Tao, an economist at UBS, said it was clear that the government has become more concerned about the continued economic slowdown.

"The government seems to put more focus on normal bank lending, recognizing the negative impact on funding costs and risks of the recent rapid development of shadow financing," Wang said. "This should help ease liquidity and lending constraints faced by banks while reducing regulatory distortion."

To dismiss fears of another credit crunch like the one in June last year, the PBOC said the current market liquidity was "appropriately sufficient" and there was no change in the basic stance of China's monetary policy.

''China will continue a prudent monetary policy and keep the liquidity stable," the PBOC said.

China has unveiled mini-stimulus in the past two months to bolster growth while maintaining reforms. The steps have so far included tax breaks and accelerating government spending in railway construction at a time when a property slowdown hits economic growth.

"The selective RRR cut will have the least impact on the broader Chinese economy, of the stimulus implemented so far in the second quarter," Jimmy Zhu, a Singapore-based economist at FXPrimus Ltd told Bloomberg News. "We expect those 'pro-growth' measures to start cooling off in the middle of the third quarter when the economy stabilizes."

The latest economic data showed China's imports shrank unexpectedly by 1.6 percent in May from the gain of 0.8 percent a month earlier — indicating weakening domestic demand. Other data for April, including industrial production, fixed-asset investment and retail sales, all fell to their lows in years, but analysts said the conditions may improve in May.