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UPDATED: June 9, 2014 NO. 24 JUNE 12, 2014
Targeted Easing
More money will be transfused into weak economic sectors
By Deng Yaqing

MORE CONVENIENCE: Consultation on applying for guaranteed loans is given at a "green channel" opened for small and micro-sized businesses in Linyi, Shandong Province (FANG DEHUA)

China has decided to intensify financial easing for agriculture-related companies, small and micro-sized businesses and other companies catering to the demands of economic restructuring.

The statement following an executive meeting presided over by Premier Li Keqiang on May 30 said the government will strengthen the "targeted reduction" of the reserve requirement ratio (RRR)—the amount of money banks have to set aside as reserves.

On April 25, the People's Bank of China (PBC), the central bank, trimmed the RRR for county-level rural commercial lenders by 2 percentage points and that for rural credit cooperatives by 0.5 percentage points, in order to bolster financial support for farmers, rural areas and agriculture. Thus, the move has been called "targeted reduction."

"The targeted reduction of the RRR is more accurate and detailed, and will positively shepherd credit resources to weak links in the national economy, such as agricultural issues and small and micro-sized businesses, thus adjusting the economic structure," said Ji Zhihong, Director of PBC's Financial Market Department, who believed the move will increase the funds financial institutions can lend while lowering financing costs for agriculture-related and small and micro-sized enterprises.

The recent two adjustments of the RRR would unleash a total of 300 billion yuan ($48.03 billion), Zong Liang, Deputy Director of Bank of China's International Finance Institute, told China Business News.

Despite stable economic expansion at the moment, the risks of an economic downturn are still there, said Ji. Such a move will both facilitate the ongoing structural reform and stabilize the economy in some ways.

More money should be supplied to shantytown renovation projects, which has the potential not only to stimulate economic growth, but also improve people's quality of life, Guo Tianyong, Director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics, told Economic Information Daily.

Ji noted efforts should be made to optimize the structure and control credit growth. "Banks should extend support to as well as control on local government financing platforms, sectors plagued by overcapacity and the real estate industry," said Ji.

Lowering financing costs

Aside from lowering the RRR, the State Council made it plain that social financing costs should also be reduced.

Ding Zhijie, Dean of the School of Banking and Finance of the University of International Business and Economics, noted that financing difficulties are universal across China's real economic sectors, not just confined to small and micro-sized enterprises, despite large injections of credit. Therefore, it's not all about money supply. "It's essential that the current financial system should be adjusted and advanced to fully back up the real economy," said Ding.

As a matter of fact, the high financing cost enterprises confront is connected, to a greater or lesser extent, with shadow banking. Wu Xiaoling, Vice Chairwoman of the Financial and Economic Committee of the National People's Congress, China's top legislature, pointed out in a recent report that the size of China's shadow banking system had reached 5.17 trillion yuan ($827.72 billion) at the end of 2013, a dramatic increase from 3 trillion yuan ($480.3 billion) in 2012.

While keeping some enterprises afloat by expanding credit supply, these non-traditional financing channels also push up social financing costs.

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