China’s central bank will cut the amount of cash some lenders must hold as reserves, unlocking about 700 billion yuan (US$108 billion) of liquidity, as it seeks to control leverage and support smaller companies.
The required reserve ratio for some banks will drop by 0.5 percentage point, effective on Friday next week, the People’s Bank of China (PBOC) said on its Web site on Sunday. That is the day before the US and China are scheduled to impose tariffs on each other.
Such a reduction had been widely expected, especially after China’s State Council said on Wednesday that it would use monetary policy tools, including cutting reserve ratios for some banks, to boost credit supply to smaller companies.
Sunday’s cut probably will probably not be the last. Analysts expect the bank to further ease policy going forward to help cope with a slowing economy and offset the effects of a crackdown on shadow banking.
“While the PBOC reiterated its neutral stance, we think that the move is one step further toward more accommodative monetary policy, which is only fitting given softening growth and mounting trade tensions,” Wei Yao, China economist at Societe Generale SA in Paris, wrote in a note.
She expects further cuts in the reserve rate ratios, lower rates on liquidity instruments and a lower interest rate corridor in the second half of the year.
The yuan yesterday continued to slide. The benchmark Shanghai stock index is on the brink of a bear market after tumbling almost 20 percent from its recent high, and closed yesterday down 1.1 percent.
The aim is to support small and micro enterprises, and to further promote the debt-to-equity swap program, according to the central bank. The cut will apply to major state-run commercial banks, joint-stock commercial lenders, postal banks, city commercial lenders, rural banks and foreign banks.
The PBOC designed the cut to do two different things, according to the statement. The 500 billion yuan unlocked for the nation’s five biggest state-run banks and 12 joint-stock commercial lenders will be channeled to debt-to-equity swaps, which can reduce companies’ debt burdens and help cleaning up banks’ balance sheets.
The 200 billion yuan freed for smaller lenders such as the postal bank and city commercial lenders will be used to support funding for smaller businesses.
The PBOC yesterday announced more details on how it will boost credit for small companies. It said it would add another 150 billion yuan in its targeted relending quota, a scheme in which banks can obtain relatively cheap funding from the PBOC to loan out to small companies and rural businesses.
The interest rate for SME relending loans will be lowered by 0.5 percentage point, the central bank said in a statement.
By requesting banks use the liquidity to support-debt-to-equity swaps, the PBOC has broadened the scope of its targeted RRR reductions. While two previous cuts were aimed at helping smaller firms, the main beneficiaries of the debt-to-equity swaps will be larger companies in traditional industries like coal, iron and other metals, according to Wen Bin, a researcher at China Minsheng Banking Corp in Beijing. Many of those are state-owned enterprises.
The swap program was introduced in 2016 to assist highly leveraged companies by encouraging banks and private investors to replace their claims on loans with equity holdings.
It has seen little progress — 102 companies had signed up for swaps worth about 1.6 trillion yuan by the end of last year, but only about 20 percent of those had been executed, according to China International Capital Corp.
The move will “help push forward the steady progress of structural deleveraging, and strengthen support to the weak links of small-and-micro businesses. It is a targeted and precise fine-tuning,” the central bank said in a separate statement. “The PBOC will keep implementing prudent and neutral monetary policy, and create a favorable monetary and financial environment for high-quality development and supply-side reform.”
The funds unlocked from the reserve ratio cut should not be used to support so-called zombie companies, the bank said.
The PBOC support of debt-to-equity “may reflect its intent to contain credit risk and prevent a significant impact on domestic business confidence,” Morgan Stanley economists led by China chief economist Robin Xing (邢自強) wrote in a note.
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