• Mon
  • Dec 22, 2014
  • Updated: 7:33am
BusinessEconomy

Reserve ratios cut for some Chinese banks as premier backs ‘reasonable’ growth

Stimulus measure comes as Premier Li Keqiang stresses need for reasonable economic growth

PUBLISHED : Monday, 09 June, 2014, 11:43pm
UPDATED : Tuesday, 10 June, 2014, 4:34am

The People's Bank of China announced details of a cut in reserve requirements for some banks and lenders yesterday, aimed at supporting small businesses, rural economies and consumption.

The central bank said the 0.5 percentage point cut, effective next Monday, would apply to two-thirds of municipal commercial banks, most rural banks, as well as car financing companies and financial leasing firms.

The announcement came as details of Premier Li Keqiang's recent remarks on the economy were released, showing what analysts say is a change of policy emphasis.

"We have said no to the blind pursuit of GDP growth. That does not mean that we no longer care about reasonable economic growth," Li (pictured) told a mayor and seven governors from the mainland's most economically vibrant areas on Friday, according to a statement on the State Council's website.

Last month the State Council revealed it would target more bank lending to small businesses and farms.

Raymond Yeung Yue-ting, a senior economist at ANZ Banking, said the reserve ratio cut reflected the State Council and Li's increasing worries over slowing economic growth.

"The RRR [reserve requirement ratio] cut is a signal that the government is considering more relaxation in monetary policy," Yeung said. "If economic data in May and June do not show a recovery, I expect a broad-based RRR cut to free up more funds in an effort to boost growth."

Zhang Zhiwei, a China economist at Nomura, estimates 95 billion yuan (HK$120 billion) will be injected into the market as a result of the reduction.

The mainland's gross domestic product grew by 7.4 per cent in the first quarter compared with a year earlier, the weakest pace in six quarters and below its target of 7.5 per cent for this year - deepening concerns about the strength of the world's second-largest economy.

Friday's conference on the economy was attended by Beijing's mayor and governors from Hebei , Shanxi , Heilongjiang , Jiangsu , Zhejiang , Guangdong and Sichuan .

Li said growth remained vitally important, despite the government's priority being restructuring the economy. He reminded officials of their "inescapable responsibility" to achieve this year's economic targets.

"No delay in action is allowed," he said.

At the meeting, Li asked ministers to submit a timetable for solving the top three problems complained of by governors: scarce credit, slowing direct investments and weak exports.

Hao Hong, chief economist and managing director of Bank of Communications (International)'s research unit, said he believed that Li's statement suggested the "government will announce more pro-growth measures to boost growth very soon".

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singleline
Suppose person A and person B are facing the problem of sharing a big cake in front of them, day in and day out.
Suppose also that A is the dominant leader while B is inferior to A.
There are only two methods to divide the cake.
In the first method, A always gets a lion share of it, only giving a very small share to B, and the cake grows very slowly over time.
In the second method, it’s fair share for all, and the cake grows much bigger in size every day.
In the long term, which method is better for the combined and individual welfare of both A and B ?
singleline
With a M2/GDP ratio of more than 2, perhaps the highest ratio in the world, China still faces the problem of high cost of financing in general.
This shows that there must be a problem with the country’s ability to efficiently allocate her scarce capital resources.
Obviously, this problem cannot be satisfactorily and completely solved simply by pumping more fresh money into the economy,
either through targeted or across-the-board RRR reduction,
because the new money will simply spiral back into the black hole in the subsequent rounds of bank lending if the present institutional arrangement remains unchanged.
singleline
A simple acid test for the effectiveness of targeted RRR reduction (or other expansionary monetary policy in general for that matter, say across-the-board RRR reduction) in promoting the financing of China's enterprises,
other than the SOEs (especially those with excess capacities which rely on new loans to rollover the old) and the local government financing vehicles (and the property sectors),
is to check whether the overall cost of capital in the country has reduced to a large extent in the subsequent periods,
and whether China's shadow banking market goes into decline,
ceteris paribus.
If yes, then the policy is effective, and the interest differential between China and the rest of the world will also drop, causing the present hot-money carry-trade capital inflow to subside or disappear, especially when the yuan has ceased to revaluate in recent days.
A happy byproduct is that China's enterprises and the local governments can then deleverage in a low-interest-rate environment (like their US counterparts under the 4 rounds of QEs).
If not, it means that the country's scarce capital is still ultimately sucked up by the black hole of the financing needs of the SOEs and the local governments (the public sector),
while the private sector, the much more efficient and innovative users of those scarce capital, is still denied the fund they sorely need and should receive.
(Chinese readers: ****economy.caixin.com/2014-06-10/100688278.html)
singleline
Obviously (or not so obviously), the more rapid and deeper development of China's municipal bond market will greatly diminish the size of the black hole (the amount of money that is absorbed by the local government financing vehicles),
and so releasing more fund to be used by its qualified users, the private enterprises.
This is more so if the local officials' promotion prospect is not guided mainly by their regions' GDP level.
Similarly, the deeper and better development of China's corporate bond market and the stock market's IPOs will also reduce greatly the size of the black hole, thereby releasing valuable fund to be used by the most efficient enterprises.
A marketised yield curve (or the public) will then efficiently guide the allocation of scarce capital to the enterprises in need of fund, especially if the SOEs become sensitive to the market interest rates (this is a big if).
This way, the bank loans can then be efficiently allocated to their most valued uses, instead of being all sucked up by the black hole, which reflects the present predicament.
singleline
"Well, then," Jesus said, "give to Caesar what belongs to Caesar, and give to God what belongs to God." His reply completely amazed them.
(New Living Translation)
The local government’s public services and public goods should be financed by their own tax revenue, fees, land revenue (to some extent), bond issuance, fiscal reserves, central government tax transfer, foreign loans (RQFII schemes), etc.
The SOEs and the private enterprises should be financed by their retained profits (if any), reserves, stock market IPOs or additional share issuance, money market, corporate bond market, junk bond market, private equity, bank loans, foreign loans, and so on.
The policy and other banks, utilizing the public’s deposit savings, should finance qualified enterprises or people of all kind, not just the SOEs or those private enterprises with relationship (or indirectly the local governments through the financing vehicles).
The people or officials in charge of the SOEs and the local governments should be held responsible for the massive debts incurred by them, to eliminate their preference for demanding loans at all costs and leaving the repayment issues to the people in the next term.
More functions (public goods) should be provided by the central government, not by the local goverments, to reduce the latter's need for fund.
Why should the country's funding method be dominated by the banks' loans alone ?
Sometimes, common sense is not so common really, especially in China.
 
 
 
 
 

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