Targeted Easing

By+Deng+Yaqing

China has decided to intensify financial easing for agriculture-related companies， small and micro-sized businesses and other companies catering to the demands of economic restructuring.

The statement following an executive meeting presided over by Premier Li Keqiang on May 30 said the government will strengthen the “targeted reduction” of the reserve requirement ratio （RRR）—the amount of money banks have to set aside as reserves.

On April 25， the Peoples Bank of China （PBC）， the central bank， trimmed the RRR for countylevel rural commercial lenders by 2 percentage points and that for rural credit cooperatives by 0.5 percentage points， in order to bolster financial support for farmers， rural areas and agriculture. Thus， the move has been called“targeted reduction.”

“The targeted reduction of the RRR is more accurate and detailed， and will positively shepherd credit resources to weak links in the national economy， such as agricultural issues and small and micro-sized businesses， thus adjusting the economic structure，” said Ji Zhihong， Director of PBCs Financial Market Department， who believed the move will increase the funds financial institutions can lend while lowering financing costs for agriculture-related and small and micro-sized enterprises.

The recent two adjustments of the RRR would unleash a total of 300 billion yuan （$48.03 billion）， Zong Liang， Deputy Director of Bank of Chinas International Finance Institute， told China Business News.

Despite stable economic expansion at the moment， the risks of an economic downturn are still there， said Ji. Such a move will both facilitate the ongoing structural reform and stabilize the economy in some ways.

More money should be supplied to shan- tytown renovation projects， which has the potential not only to stimulate economic growth， but also improve peoples quality of life， Guo Tianyong， Director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics， told Economic Information Daily.

Ji noted efforts should be made to optimize the structure and control credit growth. “Banks should extend support to as well as control on local government financing platforms， sectors plagued by overcapacity and the real estate industry，” said Ji.

Lowering financing costs

Aside from lowering the RRR， the State Council made it plain that social financing costs should also be reduced.

Ding Zhijie， Dean of the School of Banking and Finance of the University of International Business and Economics， noted that financing difficulties are universal across Chinas real economic sectors， not just confined to small and micro-sized enterprises， despite large injections of credit. Therefore， its not all about money supply. “Its essential that the current financial system should be adjusted and advanced to fully back up the real economy，” said Ding.

As a matter of fact， the high financing cost enterprises confront is connected， to a greater or lesser extent， with shadow banking. Wu Xiaoling， Vice Chairwoman of the Financial and Economic Committee of the National Peoples Congress， Chinas top legislature， pointed out in a recent report that the size of Chinas shadow banking system had reached 5.17 trillion yuan （$827.72 billion） at the end of 2013， a dramatic increase from 3 trillion yuan （$480.3 billion） in 2012.

While keeping some enterprises afloat by expanding credit supply， these non-traditional financing channels also push up social financing costs.

Banks always find it difficult to fully realize their capacity to supply credit， which makes it possible for the shadow-banking sector to raise the cost of borrowing money， said Guo. On the one hand， the financing activities of shadow banking should be standardized and controlled； on the other hand， the RRR cut should also be expanded to some other financial institutions to encourage the release of more loans， so as to lower financing costs.

“Generally， corporate financing cost has begun to stabilize and has shown signs of falling back this year， but its still higher than the level of the previous two years，” said Zhang Xiaopu， a research fellow from China Banking Regulatory Commission （CBRC）. There are reasons behind rising financing costs. Firstly， interest rate liberalization will inevitably shore up interest rates at the moment， but in the long term， it will help elevate the efficiency of capital allocation. Secondly， intermediary links such as guarantees and the assessment of collateral are high priced and lack transparency. Thirdly， declining profits force enterprises to resort to external financing， which in turn intensifies financial pressures.

Zhang said the CBRC will reduce social financing costs by further standardizing interbank lending and borrowing， trust loans， money management and entrusted loans； eliminating banks maladaptive behaviors with regard to absorbing deposits， an example of such being soliciting deposits with high interest rates； reinforcing the price control of financial services； establishing and improving the financing guarantee system； encouraging the establishment of small and medium-sized financial institutions； and speeding up the ex-pansion of direct financing.

Overall loosening unlikely

Rumors of RRR reduction for all banks have not diminished since April. Some foreign investment banks have even predicted the time is now ripe for an overall RRR cut in China. However， the governments resolution on targeted reduction on this occasion means such speculation does not have a leg to stand on.

The reinforcement of targeted financial easing doesnt mean a shift of policy direction. “Its not necessary to loosen the monetary policy as a whole， because the problem is an unreasonable structure， not scarcity of money，” said Guo.

He said if capital indiscriminately flows to all sectors， say， the real estate market and industries with excessive production capacity， things will get worse in some ways.

The expansion of targeted RRR reduction is not the prelude to a wave of overall financial easing， said Ji. “The central bank will maintain the stability of the monetary market with various financial instruments.”

Xie Yaxuan， an economist with China Merchant Securities， noted that the government chose not to relax the monetary policy because the effect of an overall RRR cut is limited in promoting banks credit creation ability.

Li Huiyong， an economist at Shenyin & Wanguo Securities， told China Business News that the financial market has apparently deviated from the economy. For one thing， interest rates are on the decline in the financial market， while rates for ordinary loans have not effectively lowered； for another， financing difficulties remain unsolved despite the fact that overall money supply is not tight. From this perspective， targeted reduction is more likely to help surmount the two contradictions than overall financial easing.

An overall RRR reduction is not in sight， said Li. Such an influential macroeconomic policy will be adopted only when current economic policy proves ineffective. Since the effects of monetary policy are usually felt three months after its implementation， economic figures in the third quarter will serve as a valuable touchstone.