State forecaster says relaxing ratio will free up capital for investment

The rising cost of borrowing is weighing on China's enterprises, especially real estate developers, an economist from a government think tank warned on Tuesday.

Zhu Baoliang, head of the State Information Center's economic forecasting department, called for more flexibility in the central bank's monetary policy, including cutting the reserve that banks must park in the People's Bank of China, the central bank.

 

Change in banks' cash reserves aimed at boosting agriculture

Experts: 'Biased mindset' needs change

"Monetary policy still has its role" in lower borrowing costs, Zhu said at a news conference organized by the State Council Information Center. And while the central bank should maintain its prudent monetary policy, "a cut in the reserve requirement ratio could be an option," he suggested.

 

China in April cut the reserve requirement ratio (RRR) for rural banks by up to two percentage points but did not slash the ratio across the board. The ratio for large financial institutions is 20 percent, and for smaller ones it is 16.5 percent.

Many economists at investment banks have called for a cut in the RRR since China's growth slowed to 7.4 percent in the first quarter, but those in the government believe such a cut would send too strong a signal.

Zhu singled out the rising long-term bond rate as a particular threat to China's economy, as corporate investment is adversely affected by it.

China's benchmark borrowing costs have risen, with the yield on China's five-year sovereign note up 83 basis points over the past year to 4.02 percent.

"Compared with the manufacturing sector and local government financing vehicles, developers are much more sensitive to a rise in long-term bond rates. Housing prices rise once the rate drops. So the rising rate really dampens property investment," Zhu said.

Property investment, a key component of fixed-asset investment in China, grew by 16.4 percent in the first four months, a further dip from the 16.8 percent expansion of the first quarter. Newly started building construction in the first four months of the year actually slumped by 22.1 percent year-over-year in terms of floor space, according to the National Bureau of Statistics.

 

Change in banks' cash reserves aimed at boosting agriculture

Experts: 'Biased mindset' needs change

What has vexed Chinese economists is the fact that the decline in interbank borrowing rates in the past month has not yet translated to a softening of the long-term borrowing rate. Many observers have noticed the paradox between China's ample money supply and persistent high borrowing rate.

 

Zhu said several factors contributed to it. A major reason, he said, is that too many large enterprises in the steel, metal, coal and chemicals - sectors with overcapacity - as well as local government financing vehicles eat up too much credit.

Burgeoning wealth management products and online financial products are competing with commercial banks for household deposits, pushing up the cost for banks to get the deposit. The interest rate liberalization process also has taken a toll, according to Zhu.

Regulations linking banks' loan ability with their deposit reserve, which forced banks to grab deposits at the end of a quarter or a month, has exacerbated the matter, he said.

Addressing structural problems, such as gradually eliminating overcapacity, strengthening oversight on online financial products and relaxing the stringent loan-to-deposit ratio, is critical to bringing down borrowing costs, Zhu said.

But as these reforms take time, more flexibility in monetary policy could ease the problem in the short term, he said.