China has taken a fresh step to boost flagging growth by cutting the level of cash reserves some lenders must hold at the central bank, in an attempt to boost lending to small businesses and the rural economy.
The People’s Bank of China said it would reduce the “required reserve ratio” by 0.5 per cent for banks that mainly lend to small businesses and rural borrowers.
In the first quarter of this year, China’s economy grew by an annual 7.4 per cent, down from 7.7 per cent in the final three months of 2013. Even if the country hits its official growth target of 7.5 per cent for 2014, it will be the slowest pace since 1990. Many economists believe even that target is unrealistic. Morgan Stanley’s Helen Qiao yesterday lowered her growth forecast for this year to just 7 per cent.
The PBoC’s latest move suggests industrial production, fixed-asset investment and inflation data due this week could show a further softening in the second quarter.
The property market is another focus of concern, with prices declining month-on-month in May for the first time since 2012.
Chinese policy makers are attempting to strike a fine balance between preventing a sharp economic slowdown or “hard landing” and reining in credit growth, which risks enlarging the country’s worrying debt burden and fuelling an overheating property market.
The new measure – which follows a similar move in late April – comes into effect on June 16 and is aimed squarely at small banks. The cut will apply to those for whom either rural or small-business loans comprised at least 50 per cent of total new loans last year and for whom such loans comprise at least 30 per cent of total outstanding loans.