CHINA'S CENTRAL BANK will cut the reserve requirement ratio for small and medium-sized commercial banks operating in counties starting from May 15. Beijing Youth Daily comments:

After the cut, the RRR for about 1,000 rural commercial banks will be reduced from the current 10 percent to 11.5 percent level to 8 percent, which will release about 280 billion yuan ($41.23 billion), which is to be used to provide loans to micro and small companies, the bank said in a statement.

Compared with the previous RRR cut which injected into the market 1.5 trillion yuan, the second cut this year is on a much smaller scale and more targeted. The targeted RRR reduction is not only made for temporary market relief, but is also based on institutional considerations and long-term motivations to build an inclusive financial system and provide sustainable financing channels for medium-sized, small and micro enterprises. The released liquidity following the RRR cut, if used appropriately, will help solve the financing problems of micro, small and medium-sized enterprises.

The central bank has implemented a series of RRR cuts over the past several years, with each of them targeted at the real economy, especially rural or small and micro enterprises. However, the liquidity released has often failed to flow to the intended recipients. Once released, funds tend to flow to such higher-profit areas as real estate, the stock market and financial products, limiting the effects of targeted RRR reductions.

While making RRR cuts, the monetary authorities should take into account how to effectively channel the released liquidity to designated sectors by means of policy tools.

The 1.5 trillion yuan released by the RRR cut in January not only solved the problem of a lack of liquidity during Spring Festival, but also boosted market confidence and played a positive role in stabilizing economic growth in the first quarter.

What the authorities should do next is to set up a tracking mechanism for the flow of released funds to ensure they are indeed used for their intended purpose. Banks that do not strictly supervise the use of the funds must be held accountable.