China’s mini-stimulus verges on micro-management
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Fine-tuning and micro-management are close cousins. China’s central bank is tending toward the latter. The latest policy tweak will let some banks lend more to the rural sector, and fits a wider regulatory trend of selective easing. But it adds needless complexity, and takes China further from its stated goal of being more market-driven.
When growth is slowing and job creation is the top priority, adding more credit to the economy is a short-term fix. So from June 16, banks which lend mostly to the rural and small business sector will only need to keep 16 percent of their deposits with the People’s Bank of China’s rather than the current 16.5 percent. The result is that these rural specialists can lend more; no such goodies for the bigger banks prone to propping up foolhardy property developers.
The stimulus, though, is likely to be small. Size up the two-thirds of city-level banks and majority of small rural lenders which qualify, and the tweak could release just 50 billion yuan of extra funding power, according to Bank of America Merrill Lynch. That compares with 774 billion yuan of new loans made in April overall. Other regulatory restraints, like the cap on loans as a percentage of deposits, further dull the impact. Nor are small businesses and farmers obviously in dire need, even if they are most often shunned by big banks.
Why bother with such a trifle? One reason is that the PBOC has a dual role, supporting growth but also avoiding financial excesses. Sometimes those goals conflict, and this kind of fudge may be the result. The central bank may have more self-seeking motives too. Stratifying banks and pledging to step up scrutiny over where they lend adds more work, but also more influence – and suggests a subtle challenge to the China Banking Regulatory Commission, which oversees individual lenders.
The main effect, though, is to increase the sense that China’s gradual approach to reform is lapsing into control freakery. Wanting to promote growth while minimising unintended consequences is understandable. But if the goal is to end up with a market-driven economy and less red tape, ceaseless fine-tuning sets the wrong tone.