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To revitalize the domestic economy， in the first half of this year， the People’s Bank of China （PBC） cut the reserve requirement ratio （RRR） for banks that have lent a certain portion of loans to agriculture-related firms and small and micro businesses， so as to free up more credit resources.
From the perspective of economic growth， the RRR cut has demonstrably worked. GDP growth in the second quarter was 0.1 percentage point higher than that in the first quarter， which has spurred calls for the continuance of this policy.
as the RRR cut is further carried out in the days to come， more agriculture-related companies， farmers， small and micro firms will no doubt benefit from it， and the market outlook will appear more optimistic. Nonetheless， such policies shouldn’t be implemented in the long term.
To begin with， monetary policy should be decided according to the monetary aggregate of a nation. at present， money supply in China is sufficient. According to statistics from the PBC， at the end of June， the M2， a broad measure of money supply that covers cash in circulation and all deposits， reached 121 trillion yuan （$20 trillion）， three times as much as that at the end of June 2008 and doubling the country’s GDP in 2013. although the RRR cut is designed solely for certain categories of bank， it will affect the monetary aggregate.
as a matter of fact， the central bank’s adoption of a targeted RRR easing rather than an overall reduction has indicated that the government hopes to shield the monetary aggregate from possible disruption. To cushion the blow of the 2008 global financial crisis， the Chinese Government released a 4-trillion-yuan （$649-billion） stimulus package， which led to a drastic expansion of the monetary aggregate and then inflation.
Targeted reduction， if used sporadically， can be tremendously useful in stimulating related sectors. However， if practiced for a long time， it will certainly affect money supply and disrupt the formulation of economic policies.
While the money supply is sufficient， the financing difficulties agriculture-related firms and small and micro businesses face are a structural problem. as the PBC’s China Monetary Policy Report for the Second Quarter of 2014 showed， total social financing reached 10.57 trillion yuan （$1.72 trillion） in the first half of the year， a record-high increase of 414.6 billion yuan （$67.3 billion） year on year. Despite that， these companies failed to benefit from it. Meanwhile， targeted easing will lead to excessive liquidity. Of course， the rebound in the second quarter has something to do with the move. yet， if the PBC decided to practice the targeted reduction in the long term， financial leverage and risks would surge.
In addition， targeted reduction falls into the category of administrative means， and will undermine the independent decisionmaking capacity of commercial banks and disrupt the overall development of the financial market. Therefore， the PBC should be cautious about such policies.
Even more importantly， the long-term implementation of targeted reduction will undermine the market’s role in directing the flow of capital and affect the uniformity of the RRR.
all in all， the fundamental key to providing long-term support and sustainability for these companies lies in the market. If farming becomes lucrative in China， money will flood in； if Chinese start-ups are as attractive as their Silicon Valley counterparts， cash flow will not be a problem. What such ventures need is more market space to develop.
Currently， China’s economic and credit structure is， to some extent， irrational， and the root cause is the severely twisted price mechanism in the financial market. If expectation management of monetary policy and the decisive role of price-based monetary measures to the market are neglected， the targeted reduction will turn into another over-expansion of commercial bank credit.
Since the targeted RRR cut has already sent a clear signal to the market， it should not be pushed to outstay its welcome. In the mid- and long term， only institutional reforms can ensure stable economic growth. Hence， the PBC should give priority to carrying out flexible open market operation， rationally managing liquidity， keeping the monetary aggregate in check and ensuring the stability of capital mobility.
From the perspective of economic growth， the RRR cut has demonstrably worked. GDP growth in the second quarter was 0.1 percentage point higher than that in the first quarter， which has spurred calls for the continuance of this policy.
as the RRR cut is further carried out in the days to come， more agriculture-related companies， farmers， small and micro firms will no doubt benefit from it， and the market outlook will appear more optimistic. Nonetheless， such policies shouldn’t be implemented in the long term.
To begin with， monetary policy should be decided according to the monetary aggregate of a nation. at present， money supply in China is sufficient. According to statistics from the PBC， at the end of June， the M2， a broad measure of money supply that covers cash in circulation and all deposits， reached 121 trillion yuan （$20 trillion）， three times as much as that at the end of June 2008 and doubling the country’s GDP in 2013. although the RRR cut is designed solely for certain categories of bank， it will affect the monetary aggregate.
as a matter of fact， the central bank’s adoption of a targeted RRR easing rather than an overall reduction has indicated that the government hopes to shield the monetary aggregate from possible disruption. To cushion the blow of the 2008 global financial crisis， the Chinese Government released a 4-trillion-yuan （$649-billion） stimulus package， which led to a drastic expansion of the monetary aggregate and then inflation.
Targeted reduction， if used sporadically， can be tremendously useful in stimulating related sectors. However， if practiced for a long time， it will certainly affect money supply and disrupt the formulation of economic policies.
While the money supply is sufficient， the financing difficulties agriculture-related firms and small and micro businesses face are a structural problem. as the PBC’s China Monetary Policy Report for the Second Quarter of 2014 showed， total social financing reached 10.57 trillion yuan （$1.72 trillion） in the first half of the year， a record-high increase of 414.6 billion yuan （$67.3 billion） year on year. Despite that， these companies failed to benefit from it. Meanwhile， targeted easing will lead to excessive liquidity. Of course， the rebound in the second quarter has something to do with the move. yet， if the PBC decided to practice the targeted reduction in the long term， financial leverage and risks would surge.
In addition， targeted reduction falls into the category of administrative means， and will undermine the independent decisionmaking capacity of commercial banks and disrupt the overall development of the financial market. Therefore， the PBC should be cautious about such policies.
Even more importantly， the long-term implementation of targeted reduction will undermine the market’s role in directing the flow of capital and affect the uniformity of the RRR.
all in all， the fundamental key to providing long-term support and sustainability for these companies lies in the market. If farming becomes lucrative in China， money will flood in； if Chinese start-ups are as attractive as their Silicon Valley counterparts， cash flow will not be a problem. What such ventures need is more market space to develop.
Currently， China’s economic and credit structure is， to some extent， irrational， and the root cause is the severely twisted price mechanism in the financial market. If expectation management of monetary policy and the decisive role of price-based monetary measures to the market are neglected， the targeted reduction will turn into another over-expansion of commercial bank credit.
Since the targeted RRR cut has already sent a clear signal to the market， it should not be pushed to outstay its welcome. In the mid- and long term， only institutional reforms can ensure stable economic growth. Hence， the PBC should give priority to carrying out flexible open market operation， rationally managing liquidity， keeping the monetary aggregate in check and ensuring the stability of capital mobility.