Targeted easing the first step to aid economy

State Council on Friday announced that it would cut reserve requirement ratio for banks that lend to the agricultural sector and small enterprises.

The move is taken as part of the central authorities' attempt to stimulate the slowing economy and prevent it from sliding further after registering a rarely low 7.4 percent year-on-year GDP growth in the first quarter.

Reserve ratio cuts to tackle slowdown

Change in banks' cash reserves aimed at boosting agriculture

However, to meet its end, the targeted easing policy must be accompanied with more favorable policies aiding the smooth development of the country's small enterprises.

Together with the easing measures in April, the latest cut in the proportion of money banks are required to hold as reserves is expected to unleash about 300 billion yuan ($48 billion) into the financial markets.

It is a boost, but not a big one. It is but a minnow compared with the scale of either China's financial market or economy.

It is, therefore, more of a testimony of the central authorities' concern about the state of the economy and their willingness to prepare for taking more easing measures if things get worse.

Even for farmers and small enterprises, however, the help the cut in the reserve requirement ratio can provide will be limited. Although it will increase bank capital available for lending to those enterprises, whether those enterprises can have real access to the lending remains questionable.

Failure of farmers and small enterprises to have adequate access to bank lending has long been a problem in China. It is primarily not because banks and financial institutions do not have enough capital, but rather, they are not willing to make the lending.

Why?