China central bank steers credit to small business with targeted reserve cut

Bloomberg

China took action to ensure credit reaches small business, rural borrowers and startups, a move tailored to shore up the economy as a vital political transition approaches.
The People’s Bank of China announced that it would reduce the amount of cash that banks must hold as reserves from next year, with the size of the cut linked to the flow of funding to parts of the economy where credit has traditionally been scarce. That distinction was underlined Saturday by manufacturing sector indicators which showed that while large firms are feeling bullish, smaller producers are less so.
The move, which could unleash upwards of 600 billion yuan ($90 billion) for new lending, shows that the government is pulling multiple levers to keep economic growth from slowing too sharply in the second half, when the all-important 19th Party Congress takes place. The targeted reserve requirement ratio cut is also a signal policy makers don’t want to ease monetary policy across the board, amid concern over rising debt.
Instead, in a manner similar to previous targeted liquidity schemes at the Bank of England and the European Central Bank, the PBOC is attempting to push funds to specific places via incentives for commercial lenders.
“The latest move is striking for the advance notice it gives the banks — apparently aimed at encouraging lending to small and medium-sized enterprises ahead of the year-end so they can clear the threshold for lower reserve requirements, ” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a report. “The timing should help buoy market confidence in the leadership change.”
The measures apply to all major banks, 90 percent of city commercial banks, and 95 percent of rural commercial lenders, the PBOC said in a statement. Cuts will range from 0.5 percentage point to 1.5 percentage point depending on how much business banks do with small firms, agricultural borrowers and new companies. Foreign banks will also be eligible for the cut should they meet requirements.
Banks get a 0.5 percentage point RRR cut if eligible lending exceeds 1.5 percent or more of their new lending in 2017 Deduction will be 1.5 percentage point if eligible lending reaches 10 percent or more of new lending in 2017, or if “inclusive finance” loans take up 10 percent of total outstanding loans in 2017 Rural commercial banks who meet an earlier requirement that at least 10 percent of new lending is local can receive a 1 percentage point reduction
The reductions are a “structural adjustment” and not a monetary policy shift, the central bank said in a Q&A. Policy makers, who have kept the benchmark lending rate unchanged for almost two years, repeated their pledge for “prudent and neutral” monetary policy.
The move will free up about 600 billion yuan, Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing and a former PBOC official, wrote in a note. Lianxun Securities Co. analysts led by Li Qilin estimated that the cut will release about 700 billion yuan. The reserve ratio requirement for large banks has remained at 17 percent since February 2016.
Data released Saturday at first glance shows little need for more stimulus, even if the economy is on a long-term slowdown. The official purchasing managers index showed the manufacturing outlook rose to a five-year high, signaling second-half growth may be more robust than expected. Output expanded 6.9 percent on year in both of the first two quarters.
That result would be unalloyed good news. But not all factories enjoy the same conditions, as a private-sector manufacturing gauge showed Saturday. The Caixin Media and Markit Economics PMI, which surveys sentiment among a group more representative of small- and medium-sized producers, fell to 51 in September from 51.6. Readings above 50 signal expansion, so the Caixin reading indicates a slower growth pace than the official survey.
The PBOC move addresses that divergence even before a reserve-ratio cut would take place in 2018, according to Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen.
“You can expect a flood of new loans targeting these firms in the last quarter so they can effectively free up this cash,” Balding said. “It is also a direct challenge to the shadow banking industry in China as this comprises a major share of their clients. China is effectively pushing this debt onto official balance sheets.”
The central bank and the country’s top leaders have consistently used language pledging “prudent and neutral” monetary policy and vowed to control financial risk since President Xi Jinping convened their Central Economic Work Conference in December.
A targeted cut taking effect in three months means the central bank “doesn’t think there’s a big need to adjust monetary policy,” and that deleveraging remains crucial as the economy has held up, Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note.
The PBOC’s broad policy stance will remain “roughly the same” through the end of 2017, according to 60 percent of economists in a Bloomberg survey conducted in August.
The PBOC also reiterated Saturday it will keep the yuan “basically stable” at a reasonable, equilibrium level and maintain “basically stable” liquidity with various policy tools, it said in a statement on its recent third-quarter policy meeting led by Governor Zhou Xiaochuan.
“Growth is well on track, leaving ample room for policy makers,” said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. “The cut doesn’t mean the PBOC has changed its ‘neither too tight nor too loose’ stance. Future policy adjustment should hinge on whether the deleveraging meets policy makers’ expectations and economic momentum.”