China to cut RRR to help agriculture, SMEs

China is to cut the reserve requirement ratio (RRR) for more banks to provide support for the rural economy and small and medium-sized enterprises (SMEs).

"The country will lower the RRR for banks whose loans for real economic activity such as lending to the agriculture sector and SMEs have reached a certain proportion," according to a statement released after a State Council meeting chaired by Premier Li Keqiang on Friday.

The statement did not specify the proportion requirement, or when the cut would be made.

China cut the RRR for county-level rural commercial banks by 2 percentage points and that of rural credit cooperative unions by 0.5 percentage point in April.

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 to shore up economic growth.

China's economy is running smoothly, but still faces "relatively big" downward pressure, according to the statement.

It added that China will continue with a prudent monetary policy and make timely and moderate pro-cyclical fine-tuning moves to improve financial services.

"The RRR cut, targeting the weakest links in the economy, will inject more vigor to growth," said Lian Ping, chief economist of the Bank of Communications.

"The targeted move also indicates broad-based RRR reductions for banks are unlikely in the near future," Lian said.

Zhang Zhiwei, an economist with Nomura Securities, said in a research note that the announcement made him more convinced that China's growth will pick up to 7.4 percent year on year in the third quarter and 7.5 percent in the fourth quarter.

But he warned the easing may push up inflation next year.

Besides the "targeted" RRR cut, other financial measures mentioned in the statement include increasing loans through the re-lending facility and issuing financial bonds for specific projects to support SMEs.

China will further reduce financing costs through regulating trust, wealth management and loan businesses, and improve efficiency in loan approval process.

The meeting also discussed measures to lessen the burden on companies through a reduction in fees charged by governments at various levels.

To ensure previously launched reform measures are implemented, the meeting concluded that the State Council will soon dispatch inspection teams to review local government work.