The People’s Bank of China, the state central bank, announced Saturday that it would lower the Reserve Ratio in January as part of a broader effort to encourage financial institutions to lend more money to small businesses instead of state-owned businesses.
The plan should help keep economic growth from slowing down sharply in the coming months, according to Bloomberg. It will release $90 billion, or 600 billion yuan in funding so that banks can let it circulate into the economy via small businesses loans.
China has not announced such a cut to its reserve ratio in two years, having favored more subtle techniques in the past 24 months to promote small businesses.
In addition, unlike in previous years when the reserve ratio has been altered to promote Small Business financing, China is now cutting the ratio only for banks that meet certain minimums for small Business Loans, further incentivizing them to join the market.
The move will make lending loans to small businesses less expensive for banks, according to the New York Times. The ratio, currently between 15 to 17 percent depending on the size of the bank, would be reduced by .5 to 1.5 percentage points for banks who move more of their business to “inclusive finance” loans of less than $750,000. Almost no bank meets this qualification, according to the New York Times, outside of a handful of rural institutions.
China downgraded
In late September, Standard and Poor downgraded China’s credit grade due to the influx of debt that has been added to the economy. “The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said in a statement with its announcement, according to the New York Times.
Four months ago, Moody’s Investor Services also downgraded its rating for China due to similar concerns about its growing debt.
The world’s most populous country has taken some steps to improve its credit rating in light of the downgrades, including tightening up standards on investment products sold to citizens and scaling back businesses that had grown reckless in its acquisitions, according to the New York Times.
Stabilizing the yuan
The move to stabilize the economy’s debt and simultaneously encourage banks to give out more small business loans comes ahead of a crucial Chinese Communist Party meeting scheduled for Oct. 18. Held every five years, the conference has the potential to bring about significant change in China’s top leadership.
Professor Christopher Balding, who teaches at the HSBC School of Business at Peking University, said the move would bring more debt out into the open, rather than in the world of shadow banking.
“You can expect a flood of new loans targeting these firms in the last quarter so they can effectively free up this cash … this comprises a major share of their clients. China is effectively pushing this debt onto official balance sheets,” Balding said in an interview with Bloomberg.
Despite the changes, the People’s Bank of China has promised that it would keep the yuan “relatively stable,” and added that the move was a “structural adjustment” rather than a monetary policy shift, according to Bloomberg.
