(Yicai Global) July 8 -- The Chinese government has signaled a cut in the bank reserve requirement ratio for the first time this year.

China will “use monetary policy tools, including RRR cuts, in due course to strengthen financial support for the real economy, especially micro, small and mid-sized companies,” the State Council, the country’s cabinet, said in a statement posted online after a regular meeting yesterday.

There is room for a reduction in the RRR, something which is also necessary for banks, especially small and mid-sized lenders, Wen Bin, a chief analyst at China Minsheng Banking, told chief Yicai Global.

“Releasing long-term capital and paring banks’ lending costs through RRR cuts helps guide lenders to further reduce financing costs in the real economy,” he said.

Targeted reductions are the most likely scenario, according to Wen. “In particular, RRR cuts targeted at small and mid-sized financial institutions to step up support for the real economy, especially small and micro businesses.”

The third quarter will be a better time window for the People’s Bank of China to implement RRR cuts or targeted RRR cuts if the price index began to show a downward trend last month and this, he said.

Green Push

The cabinet also proposed promoting green and low-carbon development and setting up monetary policy tools to support carbon emissions cuts.

Following a pilot program, a national carbon emissions trading market for the power generation industry will open sometime this month. It will slowly cover more sectors in an effort to control and scale down greenhouse gas emissions through a market mechanism.

There has been widespread discussion in the market over the design of tools to support the reduction of carbon emissions. Green refinancing is one such tool.

Ma Jun, director of the Beijing Institute of Finance and Stability, suggested that the PBOC consider setting up a larger re-lending mechanism, with the inclusion of lower-risk green assets as collateral for commercial banks to borrow from the central bank.

Wang Yifeng, chief banking analyst at Everbright Securities Research Institute, told Yicai Global that, on the one hand, re-lending, as a targeted monetary policy support tool, can provide precise support for the green financial sector. On the other hand, refinancing rates are more favorable than medium-term lending facility rates, and lower-cost funds’ support to the green financial system is also an incentive.

The PBOC conducted a one-year MLF operation of CNY200 billion (USD30.9 billion) on June 15, with a bid-winning rate of 2.95 percent. According to the bank’s re-lending and rediscount rate table on June 30, the rate of one-year re-loans for farmers and small and micro firms was 2.25 percent.

“Re-lending instruments are more flexible to use, enabling the central bank to dynamically adjust the amount based on changes in actual conditions,” Wang added.

Editors: Tang Shihua, Peter Thomas