China cuts RRR for rural financial institutions

China's central bank announced Tuesday it will cut the reserve requirement ratio (RRR) for county-level rural commercial banks by 2 percentage points and that of rural credit cooperative unions by 0.5 percentage points beginning Friday.

The adjustment will help enhance financial support for rural development and guide credit flow to the rural areas, the People's Bank of China said in an online statement.

"In the context of prudent monetary policy, the decision will not affect the overall liquidity in the banking system," said the central bank, adding it will continue to achieve reasonable growth in credit and social financing with a focus on improving the financing structure.

The RRR sets the minimum fraction of customer deposits that each bank must hold as reserves rather than lending, and is an important monetary tool used by central banks. Lowering the RRR is often aimed at boosting bank lending and economic growth.

After the adjustment, the RRR ratio for most county-level rural commercial banks will stand at 16 percent and that of rural credit cooperative unions at 14 percent.

Analysts estimate the cut will unleash around 50 billion yuan (8.1 billion U.S. dollars) to 150 billion yuan on the market.

The move is a step further after the State Council outlined last week a string of financial and tax moves to provide more support for the rural economy and bolster job creation.

"The targeted credit policy does not mean full relaxation of China's monetary policies. The prudent tone remains unchanged," said Guo Tianyong, a finance professor with the Central University of Finance and Economics.

Expectations of easing monetary policies have been running high after China's growth slowed to 7.4 percent in the first quarter, marking the lowest quarterly expansion rate since the third quarter of 2012.

But Tuesday's move has reduced the likelihood of a universal RRR cut, in a sign that the government will step up targeted efforts to bolster the faltering economy, according to analysts.

Instead of unleashing strong stimulus policies, the government this time has opted to take smaller but more targeted moves, including cutting tax for micro and small businesses, facilitating shanty-town renovation and speeding up railway construction to support growth.

It was announced at an earlier State Council meeting that China will speed up railway construction in the central and western region to push forward urbanization and reduce regional inequality, with 6,600 km of new railway lines planned for 2014 nationwide.

While hoping the investment boost will help the economy, the government is also looking to the vitality of small businesses to support growth and create enough jobs.

Tax breaks for small and micro firms will be extended till the end of 2016, according to the State Council. It is also considering raising the tax threshold significantly above the current level of 60,000 yuan.

China's small and micro-sized enterprises have played a leading role in generating jobs. Over 70 percent of new jobs are created by China's 11.7 million such operations, according to a recent report released by the State Administration for Industry and Commerce.

To ensure the healthy development in the sector, the State Council recently sent seven inspection teams to 14 provinces and regions to see whether support policies to small and micro-sized enterprises are properly implemented.