Financing to SMEs, farm sector will be key points in evaluation of lenders

The central bank is considering an annual review system to decide whether to cut lenders' reserve requirement ratio, the China Securities Journal reported on Wednesday.

Reviews will focus on whether a bank's lending to small and medium-sized enterprises and the agricultural sector has met requirements set by the central bank. The People's Bank of China has been encouraging lending to those areas - long neglected by banks in China because of higher risk.

Banks that meet the standards will have lower reserve ratios, the newspaper said, citing an anonymous source. A lower reserve requirement ratio gives a bank more funds to lend and the chance to make more profits.

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More lenders make RRR cuts

"The selective RRR cuts this year were based on the review (of support to SMEs and the agricultural sector) last year," the newspaper quoted the source as saying. "Based on this frequency, the next review will be conducted next year."

Commenting on the scale of the selective cuts, the source told the newspaper that the central bank seeks a balance between "maintaining a stable quantity" and "optimizing structure", with the focus on optimizing structure but also giving consideration to the quantity being stable.

The central bank didn't answer phone calls for comments on Wednesday.

The PBOC started cutting reserve ratio selectively this year, as part of its effort to allow greater monetary flexibility while maintaining a prudent monetary policy amid an economic slowdown.

On April 25, the PBOC cut the ratios for rural commercial banks by 2 percentage points and rural credit cooperatives by 0.5 percentage point. The majority of loans of the two types of lenders go to the agricultural sector.

Further selective cuts were launched on June 16, when the PBOC announced a 0.5 percentage point cut to commercial banks that met its requirements in lending to the agriculture sector and SMEs.

The PBOC said the cut covered two-thirds of city commercial banks and 80 percent of rural commercial banks.

Last week, four medium-sized lenders, including China Merchants Bank Co Ltd (the sixth-biggest in China), and Industrial Bank Co (ninth), confirmed that the PBOC had approved a 0.5 percentage point cut to their reserve requirement ratios.

The selective monetary easing seems to have achieved some results. The preliminary HSBC Holdings Plc manufacturing Purchasing Managers Index came in at a seven-month high of 50.8 in May, the first reading above 50, the line dividing expansion and contraction, this year.

Barclays Plc said in a Monday report that the data confirmed its view that growth has bottomed out from the first quarter, when the economy expanded by an 18-month low of 7.4 percent. The bank estimated second-quarter growth at 7.4 percent.

The May PMI reading "suggests that the government's latest targeted measures, including tax breaks, RRR cuts and export rebates, have started to take effect in supporting small enterprises," said Barclays in the report.

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