For the fifth time this year, in an effort to tighten liquidity against April inflation, China's central bank announced it will hike the reserve requirement ratio (RRR) by 0.5 percentage points. However, this will make it harder for small and medium sized enterprises (SMEs) to finance and survive, a market observer said.

Effective Wednesday May 18, large lenders will have to lock up 21 percent, and smaller banks 19 percent of deposits they receive, according to the latest rate hike. The locked up capital will not be available for lending.

This 50 basis point RRR hike is estimated to freeze about 370 billion yuan ($57 billion) in the banking system, Lu Zhengwei, a senior economist with Shanghai-based Industrial Bank, told the Global Times in a note.

This RRR hike announcement came one-day after the National Statistics Bureau released April inflation data. The consumer price index reading, a gauge for inflation, still lingers at high levels. It shows a 5.3 percent growth compared to a year earlier, and only 0.1 percentage point lower than March data.

After this RRR hike, the market will find a tighter liquidity in late May and June, with inter-bank interest rates expected to rise, Lu said.

Compared with interest rate hikes, the RRR hike is considered by the central bank to have less direct impact on the real economy.

But, some small businesses have already felt the pinch.

"The RRR hike will bring enormous pressure to small and mediums-sized enterprises for financing," Zhou Dewen, the head of the WenzhouSmall and Medium Enterprises Association, told the Global Times.

The higher the reserve requirement rate, the less money banks have available to lend to businesses, not to mention SMEs, which banks already have reluctance to lend to.

The central bank has tightened liquidity by raising interest rates four times and RRR eight times since last October.

Because smaller businesses have greater difficulty borrowing from banks under the tightening policy, SMEs have to borrow from private lenders or underground banks and pay a much higher interest rate.

Zhou said current private lending charges are as high as 36 percent in Wenzhou, well-known for small businesses and manufacturers in China.

Many economists estimate more tightening measures are ahead considering the tough inflation problem. By the end of the year, the RRR could be further raised to 23 percent, and a one-year deposit rate of 3.75 percent to 4 percent from the current 3.25 percent, Lu said.

Go to Forum >>0 Comments