PBOC to cut RRR to boost agriculture and SMEs

China's central bank announced Monday that it will cut the reserve requirement ratio (RRR) for banks with a certain proportion of lending to the agricultural sector and small firms, in a move to help boost liquidity and support those sectors.

The RRR, or the amount of deposits that banks need to hold at the central bank, will be cut by 0.5 percentage points for banks whose lending is geared toward the agricultural sector and small and micro-sized firms. This will be effective from June 16, the central bank said in a statement.

The policy will apply to banks whose new loans to the agricultural sector or to small firms exceeded 50 percent of their total new loans in 2013, and whose outstanding loans to the agricultural sector or to small firms exceeded 30 percent of their total outstanding loans.

The current liquidity is adequately sufficient and the orientation of the monetary policy remains unchanged, the statement said.

"The announcement is to honor the promises made by the government earlier to extend RRR cuts to more banks, and aid sectors and firms most in need of funds," Tang Jianwei, a senior macroeconomic analyst at the Bank of Communications in Shanghai, told the Global Times Monday.

The State Council, the country's cabinet, announced May 30 that the country will cut RRR to banks that made a certain amount of loans to the agricultural sector and smaller firms.

In a sign to further expand the scope of the RRR cut, the central bank said Monday the RRR cut will also apply to finance firms, financial leasing firms and auto finance firms in a bid to boost consumption.

"The goal here seems to be to loosen the supply of consumer credit. This is an interesting move, reflecting the central bank's use of its monetary tools to try to bring about desired structural change," Mark Williams, chief Asia economist at London-based Capital Economics, said in a research note e-mailed to the Global Times Monday.

China sets different levels of RRR for banks. The RRR for bigger banks is currently 20 percent. Lowering the RRR, which aims to boost bank lending, is usually viewed as a measure to pump up the economy. China announced its previous RRR cut in May 2012.

"The targeted RRR cut means the central bank will not announce a universal RRR cut any sooner," Tang said.

Monday's announcement also said the RRR cut will cover two-thirds of the country's urban commercial banks, 80 percent of rural commercial banks above county level and 90 percent of rural cooperatives above county level. But it will not cover those affected by the RRR cut in April.

In late April, the central bank cut the RRR for rural commercial banks at the county level by 2 percentage points and that of the rural credit cooperatives by 0.5 percentage points.

"Similar to the targeted RRR cut in April, Monday's targeted move will release between 70 billion yuan ($11.21 billion) and 100 billion yuan into the money market. Compared with the total scale of banks' required reserve worth of 20 trillion yuan, the impact will be small," said Li Huiyong, chief economist at Shenyin & Wanguo Securities.

With the government's early measures to stabilize the economy to take effect and if the real estate market will not further decline, the economy will pick up in the third quarter, Li said.

In a latest sign of stabilization in the Chinese economy, customs data showed Sunday that exports expanded 7 percent year-on-year in May, quickening from the 0.9 percent rise in April.