Banks always find it difficult to fully realize their capacity to supply credit, which makes it possible for the shadow-banking sector to raise the cost of borrowing money, said Guo. On the one hand, the financing activities of shadow banking should be standardized and controlled; on the other hand, the RRR cut should also be expanded to some other financial institutions to encourage the release of more loans, so as to lower financing costs.

"Generally, corporate financing cost has begun to stabilize and has shown signs of falling back this year, but it's still higher than the level of the previous two years," said Zhang Xiaopu, a research fellow from China Banking Regulatory Commission (CBRC). There are reasons behind rising financing costs. Firstly, interest rate liberalization will inevitably shore up interest rates at the moment, but in the long term, it will help elevate the efficiency of capital allocation. Secondly, intermediary links such as guarantees and the assessment of collateral are high priced and lack transparency. Thirdly, declining profits force enterprises to resort to external financing, which in turn intensifies financial pressures.

Zhang said the CBRC will reduce social financing costs by further standardizing inter-bank lending and borrowing, trust loans, money management and entrusted loans; eliminating banks' maladaptive behaviors with regard to absorbing deposits, an example of such being soliciting deposits with high interest rates; reinforcing the price control of financial services; establishing and improving the financing guarantee system; encouraging the establishment of small and medium-sized financial institutions; and speeding up the expansion of direct financing.

Overall loosening unlikely

Rumors of RRR reduction for all banks have not diminished since April. Some foreign investment banks have even predicted the time is now ripe for an overall RRR cut in China. However, the government's resolution on targeted reduction on this occasion means such speculation does not have a leg to stand on.

The reinforcement of targeted financial easing doesn't mean a shift of policy direction. "It's not necessary to loosen the monetary policy as a whole, because the problem is an unreasonable structure, not scarcity of money," said Guo.

He said if capital indiscriminately flows to all sectors, say, the real estate market and industries with excessive production capacity, things will get worse in some ways.

The expansion of targeted RRR reduction is not the prelude to a wave of overall financial easing, said Ji. "The central bank will maintain the stability of the monetary market with various financial instruments."

Xie Yaxuan, an economist with China Merchant Securities, noted that the government chose not to relax the monetary policy because the effect of an overall RRR cut is limited in promoting banks' credit creation ability.

Li Huiyong, an economist at Shenyin & Wanguo Securities, told China Business News that the financial market has apparently deviated from the economy. For one thing, interest rates are on the decline in the financial market, while rates for ordinary loans have not effectively lowered; for another, financing difficulties remain unsolved despite the fact that overall money supply is not tight. From this perspective, targeted reduction is more likely to help surmount the two contradictions than overall financial easing.

An overall RRR reduction is not in sight, said Li. Such an influential macroeconomic policy will be adopted only when current economic policy proves ineffective. Since the effects of monetary policy are usually felt three months after its implementation, economic figures in the third quarter will serve as a valuable touchstone.

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