Cuts to benefit SMEs

The government's latest move to cut both the benchmark lending rate and the reserve requirement ratio for smaller banks is widely seen as a bid to help SMEs hit hard by a tighter credit regime.

The People's Bank of China on Monday announced a 27-basis-point cut to the commercial banks' benchmark lending rate from yesterday. The deposit rate will remain unchanged. It was the first time the central bank has cut the benchmark lending rate since February 2002.

Meanwhile, the central bank has lowered the reserve ratio for medium and small financial institutions by 100 basis points from Sept 25. Economists and analysts said the selective reduction of the reserve ratio indicated additional efforts to make available more credit to the many cash-strapped SMEs, which formed the main client base of the smaller banks.

"This is meant to make more funds available for lending, since many of these smaller banks were already hard pressed to meet these reserve requirements with their limited deposit base compared to large loan portfolios," Stephen Green, head of research at Standard Chartered Ltd, said.

As the lowered reserve ratio will free up more funds for smaller banks to lend, "it may also be spun as a way of increasing lending to SMEs, than to the large State-owned enterprise clients of large State banks, though it is unclear how well this will work in practice", Green said.

Frank FX Gong, chief economist at JPMorgan Securities , said: "Today's move, in our view, is the beginning of monetary easing and fiscal stimulus, as policymakers strive to maintain a steady and fast growth, against the backdrop of a further downshift in external demand and continuing global financial market turmoil."

The selective reduction of the reserve ratio was seen as another targeted relief measure for SMEs, which have become increasingly important in creating new job opportunities in China.

In early August, the central bank raised the annual loan quota of local commercial banks by 10 percent - 5 percentage points more than the increase for national commercial banks. That was seen as a move to help local SMEs, most of which are customers of smaller local banks.

Economists and investment institutions expected the government would consider further interest rate cuts in the coming month, in conjunction with a more proactive fiscal policy for the rest of the year.

"In the coming months, we are likely to see targeted relief measures for the export sector, reconstruction spending and high levels of infrastructure investment," Jing Ulrich, chairwoman of China equities at JPMorgan Securities, said.

Source:China Daily