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China cuts rural banks’ reserve ratio

China’s central bank on Monday announced details of a plan that reduces the amount of money rural banks must keep in reserve, a move aimed at stimulating the economy amid slowing growth. In a statement posted on its website, the People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) by 0.5 percentage points for certain agricultural banks, as well as for financial leasing companies and auto financing firms.

The move, which takes effect on June 16, will ‘encourage commercial banks and other financial institutions to allocate more funds to areas of the real economy in need of support’, the central bank said. The State Council, China’s cabinet, first announced the planned cut in late May but did not give details.

China’s gross domestic product (GDP) grew 7.4 per cent in the first three months of 2014, weaker than the 7.7 per cent recorded in October-December last year and the worst since a similar 7.4 per cent expansion in the third quarter of 2012.

Chinese leaders have publicly ruled out a massive stimulus package to jumpstart growth as the world’s second-biggest economy tries to shift away from investment as a major economic driver, but it has unveiled tax breaks for small firms and railway construction for a boost.

Zhang Zhiwei, a China economist at Nomura, said the move is likely to affect a broad swath of China’s banking sector. ‘The PBOC’s announcement today shows the cut to be quite significant,’ Zhang said.

‘It covers two-thirds of municipal commercial banks, 80 per cent of non-county level rural commercial banks, 90 per cent of non-county level rural credit cooperatives, all finance companies, financial leasing companies, and auto financing companies,’ he added.
But Mark Williams, chief Asia economist at Capital Economics, cautioned that the cut ‘applies only to banks engaged in significant lending either to the rural economy or to small firms’.

‘For the rest of the economy, the impact will be small,’ he said, adding that the details ‘underline how reluctant policymakers remain to pursue across-the-board easing in China’.
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