China’s targeted bank reserve ratio requirement (RRR) cuts have helped boost credit support for the farming sector and small businesses, but it would be unwise to adopt the monetary tool for the long term, according to the central bank.
“Targeted RRR reduction has [helped] … optimize the lending structure and enhance support for the farming sector and small and micro-sized enterprises,” the People’s Bank of China (PBoC) said in a report released on August 1.
However, it would be “improper for China to rely on substantial increase of aggregate credit to fix the structural issues given that the nation has considerable existing loans, which are rising at fast pace,” the central bank said, according to Tencent news portal.
“If we implement the targeted RRR cut in the long run, it may give rise to some problems, such as distorting the data authenticity and weakening the role of market forces in allocating capital,” it said.
The comments show that the central bank views the targeted RRR cut as a contingency measure, and that it won’t become a norm in the future, Tencent cited Guosen Securities analysts as saying.
PBoC announced in June that it will cut the RRR by half a percentage point for banks engaged in proportionate lending to the farming sector or small and micro-sized enterprises.
On April 22, an RRR reduction was introduced for county-level rural commercial banks and rural credit cooperative unions.
Now, the PBoC may focus on utilizing pledged supplementary lending (PSL) to maintain relatively loose liquidity, analysts said. PSL is a lending instrument backed by collateral to guide medium-term interest rates, which would enable the government to provide targeted support to certain industries and projects.
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