China’s small firms to get new credit line as central bank set to cut lenders’ reserve ratios

China will use targeted cuts in banks’ reserve requirement ratios (RRR) and other policy tools to boost credit support for small firms and keep economic growth steady, the government said late on Wednesday.

Fears of a full-blown trade war with Washington have magnified concerns about the outlook for the world’s second-largest economy, following weaker-than-expected growth figures for May.

“We will use targeted RRR cuts and other monetary policy tools to enhance the ability to provide credit for small and micro firms,” state radio quoted the government as saying.

The People’s Bank of China last lowered reserve ratios for most big banks on April by 1 percentage point. Analysts said they expected further cuts this year due to slowing credit growth.

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“Over the past couple of months the PBOC has been under increasing pressure as credit supply has tightened, growth slowed, credit defaults have been rising, and Sino-US trade conflicts have been escalating,” Lu Ting, chief China economist at Nomura International in Hong Kong, wrote in a note. “We believe the imminent ‘targeted’ RRR cut could cover most banks, so effectively it is likely to be just like a universal RRR cut.”

The government has also pledged measures, such as raising rediscount quotas and cutting relending rates, to channel more loans to small firms and reduce their funding costs, the note said.

From September 1 until the end of 2020, interest income from credit up to 5 million yuan (US$772,000) for eligible small firms and households will be exempt from value added tax, it said.

Loans for small firms with a credit line of 5 million yuan or less will be included in collateral for the central bank’s medium-term lending facility.

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China will stick to its prudent and neutral monetary policy to keep liquidity stable, so as to keep economic growth in a reasonable range, the note said.

It will also strengthen policy coordination to boost market confidence, it said, following a stock market slide on Tuesday.

In a working paper on Tuesday, the central bank said China should cut the reserve requirement to help ease burdens on banks, fanning expectations of an imminent policy move as its governor urged investors to stay calm.