As China officially classifies more borrowers as small and micro-sized enterprises, the country is essentially freeing up as much as 800 billion yuan of additional cash for lending, analysts said.
The latest rule classifies companies with bank credit lines of up to 10 million yuan as small- and micro-sized enterprises, up from the previous ceiling of 5 million yuan. The new rule means more banks are likely entitled to lower reserve ratios, giving them more capacity to lend, analysts said.
Banks are entitled to a 50-basis-point reduction of required reserve ratios if their lending to small- and micro-sized enterprises reaches 1.5% of total outstanding loan balance, or of the newly added loans for the previous year. Lenders are entitled to a bigger, 150-basis-point reduction in reserve ratios if their loans to small- and micro-sized enterprises represent at least 10% of their loan book. Banks in the latter category include China Construction Bank Corp. and most of city and rural commercial banks.
China has been pushing banks to lend more to small businesses since early 2018, as the country's economic growth slowed and global trade friction escalated. The central bank has cut the reserve requirement ratios for banks by four times in 2018 and has been fine-tuning its monetary policy to boost liquidity.
Currently the reserve requirement ratio for large Chinese lenders is 14.5% and that for other smaller banks is 12.5%.
Liao Zhiming, an analyst with TF Securities, wrote in a Jan. 3 note three of China's largest state-owned banks – Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd. and Bank of China Ltd. – will be able to cross the 10% mark due to the new classification. If their reserve ratio falls to 13%, the move will likely unleash 532.2 billion yuan of liquidity to the market.
And if other smaller banks also cross the 10% mark, the combined additional liquidity to the market will likely reach 729.1 billion yuan, Liao said.
Dai Zhifeng, an analyst from Zhongtai Securities, estimated that new liquidity released by the new rule could reach 800 billion yuan.
As of Jan. 3, US$1 was equivalent to 6.87 Chinese yuan.