Back in May China announced a targeted reserve requirement ratio (RRR) cut to support economic growth. We got details on this cut on Monday.
But to think that an RRR cut can help boost growth may be expecting too much of both the cut and monetary policy in general, writes UBS’ Wang Tao.
Moreover, lack of credit growth hasn’t been the biggest challenge for Chinese companies.
Financing problems among Chinese corporates stem from the fact that small and medium enterprises (SMEs) and private companies lose out to state owned enterprises (SOEs), local government investment platforms, and property related projects.
Instead, the biggest problem facing China’s corporate sector is “the lack of investment intention or access,” writes Wang.
“For many companies, the bigger problem now is excess capacity, especially in heavy industry and construction related sectors,” writes Wang.
Excess capacity — in which demand for products is less than potential supply — continues to be one of China’s biggest problems. And, China’s credit-fuelled investment boom was a major contributor to its excess capacity problem in the first place.
“For these companies that face excess capacity, low profit margins and weak future prospect, cheaper and easier credit can help them survive better but will unlikely stimulate further investment, nor should the government want to,” writes Wang. “For many other companies especially those in the private sector and services industries, entrance barrier is the key issue, which requires faster reforms to breakdown such barriers.”
Bottomline: It’s time for more structural reforms to do more work than monetary policy.