China's targeted RRR cuts boost economic restructuring

BEIJING - The Chinese cabinet's decision to carry out targeted reserve requirement ratio (RRR) cuts in more banks is in line with its pledge to deepen financial reform and better serve the real economy, which analysts say will ultimately boost economic restructuring.

The State Council, China's cabinet, announced last week that the country will lower the RRR for banks engaged in proportionate lending to the agriculture sector and small and micro-sized enterprises (SMEs). Details of when and how much the cuts will be have not yet been announced.

Reserve ratio cuts to tackle slowdown

PBOC eases liquidity through reverse repos

The targeted credit policy continues after the RRR was cut for county-level rural commercial banks by 2 percentage points and for rural credit cooperative unions by 0.5 percentage point in April.

"Targeted RRR cuts are award measures that aim to boost financial support for the real economy. Compared to systemic RRR cuts, the distinguishing policy is more targeted and will guide credit to agriculture and small firms that badly need it," said Ji Zhihong, director of the financial market department under the central bank.

Ji forecast that the targeted cuts in RRR this time may prioritize banks that grant proportionate loans to SMEs, because RRR cuts have previously covered rural-based banks and financial institutions.

The RRR sets the minimum fraction of customer deposits that each bank must hold as reserves rather than lending, and is an important monetary tool used by central banks. Lowering the RRR is often aimed at boosting bank lending to shore up economic growth.

Analysts said the targeted move indicated that broad-based RRR reductions for banks are unlikely in the near future.

In the same statement, the cabinet said that it will optimize the country's financing structure, with financial resources to be allocated to support vital state projects, companies' upgrading efforts, and service sectors.