Macroscope | China’s plan for a soft landing hinges on bank lending
‘We think the economy has passed its cyclical peak, and will face increased headwinds from a cooling housing market and reduced fiscal support in 2018’
The People’s Bank of China (PBOC) answered the call of the State Council for providing more support to small and medium-sized enterprises (SMEs) by announcing a targeted easing of banks’ reserve requirement ratio (RRR) last week.
The RRR cut contains two tiers depending on banks’ lending to SMEs, micro businesses, start-ups and the agricultural sectors. These include: 1) a 50 basis point cut for those who lend more than 1.5 per cent of their loan books in 2017 to the targeted entities; 2) a further 100 basis point reduction for those who lend more than 10 per cent of their books.
Different from a regular RRR cut, the current policy change contains two novelties. First, it is designed to benefit banks with more exposure to the targeted sectors, and hence, encourage more lending to the “under-served” segments of the economy.
Second, the implementation starts in 2018, to partly offset the tightening effect from the macro-prudential regulation and a possible slowdown in the economy.
These innovations in policy design should, in our view, help the PBOC to achieve three things:
First, it helps to avoid sending a strong easing signal, which would run counter to the official stance of “prudent monetary policy”. Unlike a universal RRR cut, the PBOC has stressed the “targeted” nature of the move and that it is designed to drive liquidity to the under-served parts of the economy.