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.
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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.