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S&P: China's reserve rate cut insufficient to boost lending to 'desired' sectors


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S&P: China's reserve rate cut insufficient to boost lending to 'desired' sectors

S&P Global Ratings said Oct. 9 that the People's Bank of China's move to cut its reserve requirement ratio will not be enough to spur lending to small firms, private enterprises and innovation sectors.

The Chinese central bank will reduce the reserve requirement ratio, or RRR, by 100 basis points from Oct. 15, increasing liquidity in the banking system by a net 750 billion yuan, as policymakers attempt to spur growth amid signs of a slowdown.

In S&P's view, policymakers aim to maintain accommodative liquidity in the market to support the credit growth of important sectors of the economy as shadow banking credit continues to shrink.

The rating agency said the RRR cut, the fourth in 2018, does not signal a major shift in monetary policy. It expects China to maintain the expansion of credit and money supply in line with nominal GDP growth.

"The size of the RRR cut is larger than we expected and the reinvestment of released reserves into higher-yielding assets will improve short-term [net interest margins]," said S&P Global Ratings analyst Harry Hu. "However, bank capital constraints and various lending appetites are likely to constrict funds being channeled to desired sectors."

Hu noted that while the RRR cut should provide relief to banks with tight deposit bases, it is unlikely to change the business strategy of the top state-owned commercial banks. The rating agency said top banks would require additional measures and incentives to increase their exposure to small businesses, private enterprises and innovation sectors.

"Banks have so far maintained higher excessive reserves despite several RRR cuts. The major banks have maintained a cautious view toward lending, while other banks are facing funding or capital constraints to grow new loans," S&P said.

As of Oct. 9, US$1 was equivalent to 6.92 yuan.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.