context: The State Council executive meeting decided to lower reserve requirement and direct extra credit to small businesses. The government seeks to strike a balance between deleveraging the economy and sustaining growth.
The State Council executive meeting decided on 20 June 2018 to adopt five measures supporting inclusive financing for small and micro businesses, reports Xinhua News. The five measures are
- raising the credit line for refinancing supporting small businesses and lowering the refinancing interest rate
- from 1 Sep 2018 to end 2020, raising the VAT credit line from C¥1 to C¥5 million for eligible small businesses, and individual business owners
- prohibiting financial institutions from charging additional fees to small businesses for services such as fund management
- including loans to small businesses into the medium-term lending facility (MLF) collateral scope, up to a limit of C¥5 million
- using selective lowering of banks’ reserve requirement (RR) to release credit to small businesses
Selective lowering of RR is the most controversial among the five measures. Based on two precedents this year, a selective RR cut stipulates that extra money released from lowering RR shall be used for
- first, paying back MLF to People’s Bank of China (PBoC)
- second, issuing loans to small businesses
Lowering RR is controversial among central bankers and investors. On one hand, banks and corporations experienced tight liquidity due to strict deleveraging policy, and the economy faces downward pressure, says Liang Hong 梁红 China International Capital Corporation chief economist. On the other hand, lowering RR might induce excessive optimism and harm the deleveraging campaign. Therefore, PBoC has been resorting to reverse repo and medium-term lending facility to inject liquidity, says Xu Zhong 徐忠 PBoC Research Bureau director.
Banks will also benefit from an RR cut with less interest spending on MLF, according to Wang Jian 王剑 Guosen Securities chief banking sector analyst. A targeted RR cut is consistent with supply-side reform and will be used regularly to hedge against tightening credit, suggests Deng Haiqing 邓海清 Renmin University visiting professor. Deng also projects further depreciation of RMB under lower RR.