Don't put hope on RRR cut

Will RRR cuts lead to a significant easing of credit condition?

Not likely. While RRR cuts will release more liquidity, that is not the only or even main constraint to credit expansion. In addition to RRR, bank lending is regulated by quantitative controls such as lending quota, prudential regulations such as loan-to-deposit ratio (LDR) and capital requirement, and sectorial credit policies that restrict lending to various areas.

Scope of targeted RRR cut stirs market

More lenders make RRR cuts

Even if RRR is cut, many banks cannot lend more if the loan quota is not enlarged, LDR is not relaxed, or restrictions to certain sectors are not eased. The latter restrictions have contributed to many banks' moving aggressively into the shadow banking sector, hiding loans or loan-like credit through off-balance sheet credit or interbank credit market. It is also an important reason why easier liquidity in the interbank market in recent months has not translated into more credit in the economy.

In recent months, tighter regulation and supervision on shadow banking activities including trust, inter-bank businesses, and non-standard securitization have also led to a slowdown in the growth of non-loan credit. The increased interbank liquidity and lower interbank interest rates have already led to an increase in new corporate bond issuance in recent months, but banks are also bringing some shadow credit on to their balance sheet, which may crowd out other credit demand. If the government wants to see faster loan growth to offset the deceleration in shadow credit, it would have to relax lending quota, LDR and other quantitative and prudential regulations.

The author is a UBS economist. The views do not necessarily reflect those of China Daily.