This past weekend China announced that they would be be reducing their reserve ratio, in an effort to supply Chinese small businesses with loans, while supplying small business with cash. The reduction is predicted to have a limited impact on China's debt, which has become a growing issue. China has supplied an increased supply of credit to state-owned businesses, in fact more than half of lending is associated with these consistent money losers. With this move small business, who often struggle to recieve sources of cash, are now the focus for spurring economic growth.
Reducing the reserve ratio in hopes of economic growth is nothing new for China, however there is a new twist to this regulation which will be effective at the beginning of the new year. The central bank is only cutting the reserve ratio for banks that meet minimums for lending to small businesses. These loans to small business, farmers, students, and small family companies, will provide less than $5 million yuan, which is about $750,000 U.S. dollars.
This move by China's central bank is expected to ease credit for small scale-borrowers while avoiding wasteful lending. There are many incentives offered to banks that are willing to make loans in inclusive finance, as close to zero banks currently lend more than 10% of their bonds to inclusive financing. The central bank has given banks approximately 2 months to adjust and adapt to these changes. This move also was announced before the Chinese Communist Party's congress on October 18th, which is probably because the Communist party is focused on keeping the financial sector stable before the political meeting.
https://www.nytimes.com/2017/09/30/business/china-tries-to-steer-loans-to-small-businesses.html?rref=collection%2Fsectioncollection%2Fbusiness-economy&action=click&contentCollection=economy®ion=stream&module=stream_unit&version=latest&contentPlacement=1&pgtype=sectionfront
China has the right idea with this new plan. Although short term results may not be great, helping out a weak area of their economy is very smart. These next two months of adjusting and adaptation should be intriguing to watch. Hopefully the small businesses will use this influx of money properly and make the most of this plan. I look forward to seeing how this works out. However,I think that only restricting the lending to certain banks could restrict the growth a bit. This move could just simply be a trial run before expansion.
ReplyDeleteThe more important question is what is China doing about the large amount of debt that its large state-owned companies hold? A recent Reuters article reported that these large firms were being encouraged to combine in mergers and reorganize their operations. And Chinese officials are saying that the problem has been solved. But the Reuters article also said that China wasn’t doing anything real to solve huge levels of loans these large state companies have. This could create a crisis for the whole economy if the debt these firms hold gets worse.
ReplyDeletehttp://www.reuters.com/article/us-china-soe-reforms/china-says-framework-for-state-owned-enterprise-reform-basically-complete-idUSKCN1C313P?il=0
This is an interesting plan. Releasing more funds into the economy, available for investment, should in turn make borrowing more affordable--with a new lower interest rate.
ReplyDeleteIt would be interesting to know if the minimum required for lending to small businesses is a quantity or a percentage of the amount of loans.
On another note, lending to small businesses tends to be a smaller quantity than loans to larger firms. So the amount of funds being given to these smaller firms may not make as large of an impact as it seems.
The plan China is going to put in place seems like a good idea for the short run which should hopefully help the economy. I am guessing they are hoping the small businesses use this plan to their benefits and should be interesting to see how it pans out.
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