(Yicai Global) Oct. 14 -- Analysts are divided on whether China’s central bank will slash the reserve requirement ratio, which is the percentage of capital banks must hold in reserve and cannot lend out, in the fourth quarter, following a 0.5 percentage point lowering in July, as the amount of social financing dropped in September on less-than-expected loan issuance.

It will be necessary to lower the RRR by another 0.5 percentage point as the banking industry’s loan-to-deposit ratio has not changed significantly since the July cut, said Lian Ping, chief economist of Zhixin Investment and dean of Zhixin Investment Research Institute. Some lenders are having difficulties in increasing their debt and therefore the amount of credit they can offer is limited.

His view was countered by Zhou Maohua, a macro-economy researcher at China Evergrande Bank, who felt that the PBOC is unlikely to cut the RRR anytime soon as the central bank needs to observe the situation further. China's economic recovery is facing complex problems and not all of them can be solved by relaxing monetary policy, he said. Besides, the country’s overall monetary and credit environment remains within a reasonable range, he added.

Zheng Houcheng, director of Yingda Securities Research Institute, though, felt that the PBOC is highly likely to introduce another RRR cut soon to boost the growth of M2 broad money and social financing in a bid to underpin China's macro economy.

Sluggish Borrowing

Social financing, which is a measure of the total funds pumped into the real economy from the financial system, was CNY2.9 trillion (USD451 billion) in September, 1.7 percent less than the same period last year but up CNY387.6 billion from 2019, according to data released by the People’s Bank of China yesterday.

September’s reduced social financing is mostly caused by slower gains in on-balance sheet loans, off-balance sheet financing and government bond issuance as well as a higher base number from last year, said Wen Bin, chief researcher at China Minsheng Bank. This is reflected in weaker demand, he added.

New yuan-denominated loans increased CNY1.66 trillion (USD258 billion) last month, CNY232.7 billion less than the same period last year as medium- and long-term loans for individuals and businesses contracted.

There a number of factors behind the sluggish growth in credit, said Zhou. Firstly, some construction companies have started to use bank loans to raise money as the financing environment for real estate sector became tighter. Secondly, the slowdown in property purchases has meant fewer long-term loans for individuals. Thirdly, some firms are adopting a wait-and-see approach due to increased energy and industrial raw material prices as well as the global logistics supply bottleneck.

Last month, the PBOC promised another CNY300 billion (USD46.6 billion) worth of reloans to target micro and small businesses as well as the self-employed. Only a small portion of this was issued in September, and more should be available in the fourth quarter, said Lian.

Editors: Liao Shumin, Kim Taylor