People's Bank of China moves to free up ¥400bn to boost SME lending
The People’s Bank of China has cut the amount of cash smaller banks must keep in reserve, as it looks to bolster the country’s economic recovery following the Covid-19 outbreak.
The central bank said it would cut the Required Reserve Ratio for rural and small and medium-sized city banks by 0.5 percentage points on 15 April and 15 May, making a combined reduction of 1 percentage point. The move is expected to release ¥400bn (£45.88bn) and is hoped will encourage lending.
The bank also announced it would lower the interest rate paid for excess reserves, from 0.72% to 0.35%.
China’s economy, already battling a consumer slowdown and slower growth, ground to a halt following the outbreak of coronavirus and the stringent lockdown measures brought in to try and contain it.
Iris Pang, chief economist, Greater China, for ING, said Friday's move by the central bank suggested that the economic fallout from the pandemic “could linger at least until May”. “Just how effective this targeted RRR cut will be, however, is questionable," she added.
“The cuts are aimed at smaller banks to encourage them to lend to SMEs. But banks have been reluctant to lend to SMEs that are facing difficult in this pandemic.
"This could be especially true for exporters who are facing order withdrawals from the west. The Easter holiday is an important export season for China; with the lockdown and increased social distancing in Europe and the US, sales in western markets are expected to be dismal.”
Pang concluded: “The central bank may find it difficult to encourage banks to lend to those most in need without government load guarantees.
“A combination of monetary policy and fiscal policy is necessary at this time.”