Home » Business » Finance Special
Looser monetary policy: does it still have a bite?
Print Edition
CHINA’S central bank has released more cash into the system by cutting the reserve requirement for small and rural banks twice in the last two months, its latest effort to help the weakest sectors through difficult economic times.
Analysts estimate reducing the amount of money those lenders are required to keep in reserve will release around 150 billion yuan (US$24 billion), a relatively small amount compared with the size of the world’s second-largest economy.
However, gestures count in signaling the People’s Bank of China’s intention to keep liquidity at its targeted “appropriate level” to support economic expansion, but some economists said they doubt that any monetary easing measures will provide much of a fix now.
“The expectation that reserve requirement ratio cuts can stimulate economic growth places too much importance not only on such a move generating credit growth, but also on the role monetary policy can play,” said Wang Tao, chief China economist at UBS. “Fundamentally, the problems in the real economy are not caused by too little credit. Financing problems faced by some corporates are mainly structural.”
Targeted easing
The latest cut, which comes into effective today, mostly helps city-level and rural banks that focus on small businesses and agricultural lending. As of today, those banks will be required to keep 16 percent of their total deposits on reserve with the central bank, while larger banks, including the Big Five state-owned banks, are still subject to a 20 percent set-aside.
Small companies have long suffered from choked access to bank loans as lenders favor large, state-owned enterprises, local government investment vehicles and property related projects, Wang said.
Cutting the reserve requirement in a targeted manner is considered a compromise between policies boosting the economy and those seeking to rebalance it, Wang added.
Broader monetary easing could end up flooding certain sectors, such as real estate and industrial energy guzzlers, that still need reining in, while refraining from adding cash at all could deter economic expansion at large.
Analysts predict the central bank won’t move to alter the broader reserve requirement any time soon because policy makers need time — usually at least three months — to observe the results of a newly implemented policy.
An across-the-board reserve requirement cut of 0.5 percentage point could release more than 500 billion yuan into the economy.
Central bank Governor Zhou Xiaochuan in May said China is facing an “unusually complicated” economic situation, where policy makers are trying to manage multiple tasks simultaneously amid increasing downward pressure. Those tasks include stabilizing economic growth, making structural adjustments, driving reforms, controlling financial risks and improving public welfare, Zhou said.
To avoid repeating the adverse effects of its 4 trillion yuan stimulus program begun in 2008, the government this year has been implementing what it calls “mini-stimulus” measures.
The massive injection six years ago caused a record buildup of debt and a property bubble that still haunt the economy today.
Since the second half of last year, the central bank has adopted surgical tools rather than sweeping measures to adjust market liquidity. Those tools include open market operations, depreciation of the yuan, re-lending to selected banks to support construction projects and the latest reserve requirement cuts.
The central bank last week pledged continuous efforts to increase financial support for small companies and the farm sector, and the Ministry of Finance ordered accelerating fiscal spending on infrastructure and agricultural projects.
Reforms needed
Although the central bank has repeatedly stated it will maintain a “prudent” stance with flexibility, some economists worry that the effectiveness of any kind of monetary easing will diminish if financial and administrative reforms remain stagnant.
Targeted monetary easing is more flexible in meeting the intentions of the central bank, but, at the same time, implementation is sometimes more arbitrary than with an all-inclusive approach.
The World Bank said in a report last week that fiscal and financial reforms should stay at the center of China’s policy responses to economic challenges.
“Delays in implementing coherent reforms could perpetuate resource misallocation, undermine the health of the banking system, threaten the debt sustainability of local governments and increase the fiscal costs of reforms,” the report said.
Karlis Smits, senior economist at the World Bank and main author of the report, said that targeted easing measures could be effective in the short run, but the growth outlook will depend on the implementation of structural reforms China outlined last November to allow the market to play a more decisive role.
Financial distortions, such as implicit government guarantees for companies, especially state-owned ones, are hindering the effects of monetary policy, the report warned.
It urged authorities to supervise more effectively rapid credit growth, especially in the shadow banking system, and to engineer a reduction in local government debt that has accumulated through off-budget activities.
“The proposed reform measures are structural in nature,” said Smits. “In the medium term, these policy measures will improve the quality of China’s growth – making it more balanced, inclusive and sustainable — and will lay the foundation for sound economic development.”
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
