Chinese banks brace as more reserve cuts loom to boost credit-short SMEs

Easing monetary policy will ease credit crunch firms face as part of the shadow banking crackdown.

The decision by China’s central bank to further cut the reserve requirement ratio (RRR) by 0.5% which unleashed around $180b (CNY700b) into the financial system is a welcome development for local private enterprises struggling against a credit crunch following Beijing’s widespread shadow banking crackdown, according to BMI Research.

Around $30.27b (CNY200b) worth of liquidity will be released from Postal Savings Bank of China, city and rural commercial banks and foreign banks which will in turn be directed towards supporting the growth ambitions of SMEs. 

“In our view, these local banks have closer relationships with smaller companies in their respective provinces, and therefore, will be able to target the loans better than large state-owned banks that usually lend to state-owned enterprises,” said BMI.

The move might also alleviate refinancing risks which have been on the rise for private Chinese firms after accounting for 61.5% of the 13 onshore issuers that have defaulted since the start of the year.

“As such, these targeted RRR cuts remain consistent with the central bank’s current “prudent and neutral” policy stance as well as the government’s objectives including deleveraging, reforms and prevention of financial risks,” UOB analyst Suan Teck Kin said in a note.

Banks need to brace as the RRR cut is unlikely to be the last in light of weakening investment growth and trade tensions with the United States, BMI added.

Following the cut which will take effect from July 5, the RRR large and medium banks will be lowered to 15.5% whilst that of smaller banks will be reduced to 13.5%.