By Yin Lei
China’s state council decided to deal a targeted cut to the required reserve ratio (RRR) on Wednesday, which is part of its five-pronged approach to pump more credits into small and micro businesses.
With these latest measures, the state council aims to make it easier for them to obtain financing at a lower cost.
The re-lending and re-discounting volume will both be increased to shore up such businesses and drive the development of the agriculture sector. The re-lending rate will also be reduced.
The value-added tax (VAT) exemptions will apply to a higher credit line. From September 1 to the end of 2020, loans not exceeding RMB five million, as provided to small and micro businesses and self-employed business owners, will qualify for VAT exemptions for banks’ interest income. Currently, this amount stands at RMB one million.
Additional charges on loans to small and micro businesses are prohibited, e.g., management fees and commitment fees.
Banks are encouraged to direct services to more small and micro businesses and set up more branches for this purpose. Monetary policy tools such as the targeted RRR cut will function to boost their credit supply. Debt-to-equity swap agreements that have already been signed should be quickly exercised.
Loans to small and micro businesses with a credit line of RMB five million can be pledged as collateral in the acquisition of the medium-term lending facility (MLF).
To ease financing difficulties for the real economy companies and small and micro businesses in the short term, the RRR cut has a wider coverage and is more targeted than open market operations like the MLF, said Shen Jianguang, chief economist of the Mizuho Securities Co., Ltd., to the Economic Information Daily.
China’s monetary policies will continue to serve the task of deleveraging the financial sector and, fine-tuned with the targeted RRR cut and the MLF operation, become more prudent and neutral, he believed.
