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Targeted RRR Cut Benefits Small Businesses, Banks

The required reserve ratio cut targeting county-based small banks will also help small local businesses develop, expert says

By Xu Mouquan Updated May.16

China’s central bank recently announced a required reserve ratio (RRR) cut targeted at county-based rural commercial banks that serve local businesses and have gross assets of less than 10 billion yuan (US$1.45b). In effect starting May 15, the RRR cut is expected to unleash around 280 billion yuan (US$40.83b) in long-term funds  for financing private and small and micro-businesses, reported newspaper Financial News
In the past, authorities have pushed medium and small-sized financial institutions, like rural commercial banks, to focus on helping micro and small businesses. 
This latest targeted RRR cut is another important step toward resolving financing difficulties for businesses, Dong Ximiao, deputy president of the Chongyang Institute for Financial Studies, the Renmin University of China, told the newspaper. 
China is building a multi-level banking system in which smaller banks play an important role, Dong said, as increasing the number and business of smaller institutions is an essential part of financial supply-side structural reforms.
Since China already has a high proportion of such banks, authorities should shift the focus to supporting their healthy and steady development. The targeted RRR cut signals a differentiation in RRR conducive to their development, Dong noted.
Despite releasing a modest amount of money compared to previous reductions, the targeted RRR cut is a substantive step toward developing a policy framework involving relatively low RRR for smaller banks, he said.  
Authorities should deliver targeted help to smaller banks and businesses, and establish a well-rounded, comprehensive policy framework to smooth monetary policy transmission mechanisms and deepen the liberalization of interest rates, Dong proposed.